**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**


**FORM
      10-KSB**


xANNUAL
      REPORT PURSUANT
      TO SECTION 13 OR 15 (d) OF THE


SECURITIES
      EXCHANGE ACT OF 1934


**FOR
      THE FISCAL YEAR ENDED JULY 31, 2007**


oTRANSITION
      REPORT
      PURSUANT TO SECTION 13 OR 15 (d) OF THE


SECURITIES
      EXCHANGE ACT OF 1934





**Commission
      File No. 0-13078**





**CAPITAL
      GOLD CORPORATION**


(Name
      of
      Small business issuer in its charter)





**State
                of Delaware**
            **13-31805030**(State
                or other jurisdiction of
            (I.R.S.
                EmployerIncorporation
                or organization)
            Identification
                No.)





**76
                Beaver Street, 14****th****Floor, New York, New York**
            **10005**(Address
                of principal executive offices)
            (Zip
                Code)





**Issuer’s
      telephone numbering: (212) 344-2785**





Securities
      registered under Section 12(b) of the Exchange Act: none




Securities
      registered under Section 12(g) of the Exchange Act: Common Stock, par value
      $.0001 per share





Indicate
      by check mark if the registrant is not required to file reports pursuant to
      Section 13 or Section 15(d) of the Act. Yes
oNo
x





Check
      whether the issuer (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Exchange Act during the past 12 months (or for such shorter period
      that the registrant was required to file such reports), and (2) has been subject
      to such filing requirements for the past 90 days. YES xNO o





Check
      if
      there is no disclosure of delinquent filers in response to Item 405 of
      Regulations S-B contained in this form, and no disclosure will be contained,
      to
      the best of the registrant’s knowledge, in definitive proxy or information
      statements incorporated by reference in Part III of this Form 10-KSB or any
      amendment to this Form 10-KSB. o





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act). Yes
oNo
x





State
      issuer’s revenues (consists solely of interest income and immaterial
      miscellaneous other income) for its most recent fiscal year.
      $145,993.





The
      aggregate market value of the voting and non-voting common equity held by
      non-affiliates computed by reference to the average between the closing bid
      ($0.46) and asked ($0.46) price of the issuer’s Common Stock as of October 12,
      2007, was $75,376,588 based upon the average between the closing bid and asked
      price ($0.46) multiplied by the 163,862,148 shares of the issuer’s Common Stock
      held by non-affiliates.




The
      number of shares outstanding of each of the issuer’s classes of common equity as
      of October 12, 2007 :
      171,743,648.




DOCUMENTS
      INCORPORATED BY REFERENCE: None.




Transitional
      Small Business Disclosure Format: Yes oNo x











CAPITAL
      GOLD CORPORATION


Form
      10-KSB


July
      31,
      2007




Table
                    of Contents
                
                PageGlossary
                
                
                (ii)Part
                    IItem
                    1.
                Description
                    of Business.
                
                1Item
                    2.
                Description
                    of Property.
                
                11Item
                    3.
                Legal
                    Proceedings.
                
                18Item
                    4.
                Submission
                    of Matters to a Vote of Security Holders.
                
                19Part
                    IIItem
                    5.
                Market
                    for Common Equity, Related Stockholder Matters and Small Business
                    Issuer
                    Purchases of Equity Securities.
                
                19Item
                    6.
                Management's
                    Discussion and Analysis of Financial Condition and Results of
                    Operations;
                    Plan of Operations.
                
                21Item
                    7.
                Financial
                    Statements.
                
                33Item
                    8.
                Changes
                    in and Disagreement with Accountants on Accounting and Financial
                    Disclosure.
                
                33Item
                    8A
                Controls
                    and Procedures.
                
                33Item
                    8B
                Other
                    Information.
                
                34Part
                    IIIItem
                    9.
                Directors,
                    Executive Officers, Promoters and Control Persons; Compliance
                    with Section
                    16(a) of the Exchange Act.
                
                34Item
                    10.
                Executive
                    Compensation.
                
                40Item
                    11.
                Security
                    Ownership of Certain Beneficial Owners and Management and Related
                    Stockholder Matters.
                
                44Item
                    12.
                Certain
                    Relationships and Related Transactions.
                
                47Item
                    13.
                Exhibits
                
                48Item
                    14.
                Principal
                    Accountant Fees and Services
                
                51Signatures
                
                53Supplemental
                    Information
                
                54Financial
                    Statements
                
                F-1
  
  **GLOSSARY
        OF TECHNICAL TERMS**


Reserve:
              
              That
                  part of a mineral deposit which could be economically and legally
                  extracted or produced at the time of the reserve determination.
                  Reserves
                  must be supported by a feasibility study done to bankable standards
                  that
                  demonstrates the economic extraction ("Bankable standards" implies
                  that
                  the confidence attached to the costs and achievements developed
                  in the
                  study is sufficient for the project to be eligible for external
                  debt
                  financing.) A reserve includes adjustments to the in-situ tonnes
                  and grade
                  to include diluting materials and allowances for losses that might
                  occur
                  when the material is mined.Proven
                  Reserve:
              
              Reserves
                  for which (a) quantity is computed from dimensions revealed in
                  outcrops,
                  trenches, workings or drill holes; grade and/or quality are computed
                  from
                  the results of detailed sampling and (b) the sites for inspection,
                  sampling and measurement are spaced so closely and the geologic
                  character
                  is so well defined that size, shape depth and mineral content of
                  reserves
                  are well-established.Probable
                  Reserve:
              
              Reserves
                  for which quantity and grade and/or quality are computed from information
                  similar to that used for proven (measured) reserves, but the sites
                  for
                  inspection, sampling, and measurement are farther apart or are
                  otherwise
                  less adequately spaced. The degree of assurance, although lower
                  than that
                  for proven reserves, is high enough to assume continuity between
                  points of
                  observation.Mineralized
                  Material
              
              The
                  term “mineralized material” refers to material that is not included in the
                  reserve as it does not meet all of the criteria for adequate demonstration
                  for economic or legal extraction.Non-reserves
              
              The
                  term “non-reserves” refers to mineralized material that is not included in
                  the reserve as it does not meet all of the criteria for adequate
                  demonstration for economic or legal extraction.Exploration
                  Stage
              
              An
                  “exploration stage” prospect is one which is not in either the development
                  or production stage.Development
                  Stage
              
              A
                  “development stage” project is one which is undergoing preparation of an
                  established commercially mineable deposit for its extraction but
                  which is
                  not yet in production.  This stage occurs after completion of a
                  feasibility study.Production
                  Stage
              
              A
                  “production stage” project is actively engaged in the process of
                  extraction and beneficiation of mineral reserves to produce a marketable
                  metal or mineral product.
  ii


**ADDITIONAL
      DEFINITIONS**





Caliche:
            
            Sediment
                cemented by calcium carbonate near surface.Diorite:
            
            Igneous
                Rock (rock formed from magma or molten rock).Dore:
            
            Bars
                of low purity precious metal (Gold & Silver) which represents final
                product of a gold mine typically weighing 25 kg per
                bar.Dikes:
            
            Tabular,
                vertical bodies of igneous rock.Fissility:
            
            Shattered,
                broken nature of rock.Fracture
                Foliations:
            
            Fracture
                pattern in rock, parallel orientation, resulting from
                pressure.Heap
                Leaching:
            
            Broken
                and crushed ore on a pile subjected to dissolution of metals by leach
                solution.Hydrometallurgical
                    Plant:
            
            A
                metallurgical mineral processing plant that uses water to leach or
                separate and concentrate elements or minerals.Intercalated:
            
            Mixed
                in.Litho
                static Pressure:
            
            Pressure
                brought on by weight of overlaying rocks.Major
                    Intrusive Center:
            
            An
                area where large bodies of intrusive igneous rock exist and through
                which
                large amounts of mineralizing fluids rose.Mesothermal:
            
            A
                class of hydrothermal ore deposit formed at medium temperatures and
                a
                depth over one mile in the earth’s crust.Microporphyritic
                    Latite:
            
            Extremely
                fine grained siliceous igneous rock with a distribution of larger
                crystals
                within.Mudstone:
            
            Sedimentary
                bed composed primarily of fine grained material such as clay and
                silt.PPM:
            
            Part
                per million.Pyritized:
            
            Partly
                replaced by the mineral pyrite.Reverse
                      Circulation Drilling
                    (or
                      R.C. Drilling):
            
            Type
                of drilling using air to recover cuttings for sampling through the
                middle
                of the drilling rods rather than the outside of the drill rods, resulting
                in less contamination of the sampled
                interval.




iii




Sericitized:
            
            Rocks
                altered by heat, pressure and solutions resulting in formation of
                the
                mineral sericite, a very fine grained mica.Siltstone:
            
            A
                sedimentary rock composed of clay and silt sized particles.Silicified:
            
            Partly
                replaced by silica.Stockwork
                Breccia:
            
            Earth's
                crust broken by two or more sets of parallel faults converging from
                different directions.Stockwork:
            
            Ore,
                when not in strata or in veins but in large masses, so as to be worked
                in
                chambers or in large blocks.Surface
                Mine:
            
            Surface
                mining by way of an open pit without shafts or underground
                working.




iv




**PART
      I**





**Item
      1.** **Description
      of Business**





**Sonora,
      Mexico Concessions**





El
      Chanate





Through
      a
      wholly-owned subsidiary and an affiliate, Capital Gold Corporation (the
      "Company," “we” or “us”) owns 100% of 16 mining concessions located in the
      Municipality of Altar, State of Sonora, United States of Mexico
      totaling approximately 3,543 hectares (8,756 acres or 13.7 square miles). We
      have constructed an open-pit gold mining operation and we are mining two of
      these concessions. We commenced mining operations in late March 2007 and
      achieved gold production and revenue from operations in early August 2007.
      During August and September 2007, we produced approximately 6,850 ounces of
      gold
      and 5,222 ounces of silver. Of this production, we sold 6,384 ounces of gold
      for
      proceeds amounting to approximately $4,380,000. The gold dore is being refined
      for us in Mexico by Met-Mex Penoles. We sometimes refer to the operations on
      these two concessions as the El Chanate Project.





In
      May
      2007, we completed an expanded 72-hole reverse circulation drilling campaign
      to
      identify additional proven and probable gold reserves at the El Chanate Project.
      The 72 holes totaled approximately 8,300 meters, and were positioned to fill
      in
      gaps in the ore body and test the outer limits of the currently known ore zones.
      We turned the assay data over to Independent Mining Consultants, Inc. (“IMC”) of
      Tucson, AZ to update our ore reserve and our mine plan. On August 30, 2007,
      IMC
      delivered to us an updated resource block model and an updated mine plan and
      mine production schedule (the “2007 Report”). The original feasibility study
      (the “2003 Study”) on the El Chanate Project was prepared by M3 Engineering of
      Tucson in August 2003. M3 updated the 2003 Study in October 2005 (the “2005
      Study”). An August 2006 technical report from SRK Consulting, Denver, Colorado
      (the “2006 Update”) further updated the feasibility study.





According
      to the 2007 Report, our proven and probable reserve tonnage has increased by
      approximately 98 percent from 19.9 million to 39.5 million metric tonnes with
      a
      gold grade of 0.66 grams per tonne (43.5 million US short tons at 0.019 ounces
      per ton). The open pit stripping ratio is 0.6:1 (0.6 tonnes of waste to one
      tonne of ore). The updated pit design for the revised plan in the 2007 Report
      is
      based on a plant recovery of gold that varies by rock types, but is expected
      to
      average 66.8%. A gold price of US$550 (three year average as of July 31, 2007
      as
      determined by IMC) per ounce was used to re-estimate the reserves compared
      with
      a gold price of $450 per ounce used in the previous estimate.





Gold
      production at El Chanate is currently near the feasibility study rate of 4,000
      ounces per month. We plan to slowly start to ramp up daily tonnage levels from
      7,500 tonnes per day (“tpd”) to 10,000 tpd. This should boost our gold
      production toward 5,000 ounces per month (60,000 ounces per year). Initially,
      we
      anticipate that the increased plant throughput will not require any capital
      since an additional ore crushing and stacking capacity was factored into the
      original design.





With
      the
      recent reserve increase, we are analyzing what steps are necessary to
      effectively increase production rates to 100,000 ounces per year and improve
      gold recoveries by conducting further metallurgical test work at our laboratory
      facilities at the mine. To this end, we have contacted Golder Engineering to
      supply EPCM (engineering, procurement and construction management) services
      for
      leach pad expansion and to study the impact of the planned mining increase.
      In
      addition, we are discussing options available with the crusher manufacturer,
      Excel Machinery, with regards to adding an additional secondary crusher into
      the
      crushing circuit, to enable the system to handle increased tonnage. We
      anticipate that another crusher should move daily tonnage up closer to 14,000
      tpd.




1





For
      more
      information on the El Chanate Project, please see *“Item
      2. Description of Property; El Chanate Properties - Sonora,
      Mexico.”*





**Competition**





The
      acquisition of gold properties and their exploration and development are subject
      to intense competition. Companies with greater financial resources, larger
      staffs, more experience and more equipment for exploration and development
      may
      be in a better position than us to compete for such mineral properties. Our
      lack
      of revenues and limited financial resources further hinder our ability to
      acquire additional mineral properties.





**Human
      Resources**





As
      of
      October 12, 2007, we had 104 full time employees and 6 temporary employees,
      including our current officers and administrative personnel in the US and in
      Mexico. In addition, our chief financial officer devotes approximately 85%
      of
      his time to us.





**Cautionary
      Statement on Forward-Looking Statements**





Certain
      statements in this report constitute “forwarding-looking statements” within the
      meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
      Securities and Exchange Act of 1934. Certain, but not necessarily all, of such
      forward-looking statements can be identified by the use of forward-looking
      terminology such as “believes,” “expects,” “may,” “will,” “should,” or
“anticipates” or the negative thereof or other variations thereon or comparable
      terminology, or by discussions of strategy that involve risks and uncertainties.
      All statements other than statements of historical fact, included in this report
      regarding our financial position, business and plans or objectives for future
      operations are forward-looking statements. Without limiting the broader
      description of forward-looking statements above, we specifically note that
      statements regarding exploration and mine development and construction plans,
      costs, grade, production and recovery rates, permitting, financing needs, the
      availability of financing on acceptable terms or other sources of funding,
      and
      the timing of additional tests, feasibility studies and environmental permitting
      are all forward-looking in nature.





Such
      forward-looking statements involve known and unknown risks, uncertainties and
      other factors, including but not limited to, the risk factors discussed below,
      which may cause our actual results, performance or achievements to be materially
      different from any future results, performance or achievements expressed or
      implied by such forward-looking statements and other factors referenced in
      this
      report. We do not undertake and specifically decline any obligation to publicly
      release the results of any revisions which may be made to any forward-looking
      statement to reflect events or circumstances after the date of such statements
      or to reflect the occurrence of anticipated or unanticipated
      events.




2


**Risk
      Factors**





**The
      risks described below should not be considered to be comprehensive and
      all-inclusive. Additional risks that we do not yet know of or that we currently
      think are immaterial may also impair our business operations. If any events
      occur that give rise to the following risks, our business, financial condition,
      cash flow or results of operations could be materially and adversely affected,
      and as a result, the trading price of our Common Stock could be materially
      and
      adversely impacted. These risk factors should be read in conjunction with other
      information set forth in this report, including our Consolidated Financial
      Statements and the related Notes.**





**Risks
      related to our business and operations**





***We
      have just begun generating operating revenues. If we are unable to sustain
      operating revenues, we will not be able to generate profits and our business
      may
      fail.***





Until
      recently, we had no producing properties and, historically, have operated and
      continue to operate at a loss. We only commenced gold producing activities
      and
      started to generate revenues in August 2007. Our ultimate success will depend
      on
      our ability to generate profits from our properties. Our viability is largely
      dependent on the successful commercial development of our El Chanate gold mining
      project in Sonora, Mexico. While we have commenced revenue producing mining
      operations, we cannot assure if or when revenues will cover cash flow or
      generate profits.





***We
      just recently started to receive cash flow from operations and, historically,
      have relied on external funding sources. While we believe that, with continuing
      cash flow from operations, we have adequate funds to permit us to reach positive
      cash flow from such operations, if we encounter unexpected problems and we
      are
      unable to generate positive cash flow in a timely manner, we may need to raise
      additional capital. If additional capital is required and we are unable to
      obtain it from outside sources, we may be forced to reduce or curtail our
      operations or our anticipated exploration activities.***





Historically,
      we have not generated cash flow from operations. We believe that we have
      adequate funds to cover our financial requirements until such time as mining
      operations at the El Chanate Project generate positive cash flow. However,
      if we
      encounter unexpected problems and we are unable to generate positive cash flow
      in a timely manner, we may need to raise additional capital. We also may need
      to
      raise additional capital for property acquisition and new exploration. To the
      extent that we need to obtain additional capital, management intends to raise
      such funds through the sale of our securities and/or joint venturing with one
      or
      more strategic partners. We cannot assure that adequate additional funding,
      if
      needed, will be available . If
      we
      need additional capital and we are unable to obtain it from outside sources,
      we
      may be forced to reduce or curtail our operations or our anticipated exploration
      activities.





***Our
      Credit Facility with Standard Bank plc imposes restrictive covenants on us.***





Our
      Credit Facility with Standard Bank requires us, among other obligations, to
      meet
      certain financial covenants including (i) a debt service coverage ratio of
      not
      less than 1.2 to 1.0, (ii) a projected debt service coverage ratio of not less
      than 1.2 to 1.0, (iii) a loan life coverage ratio of at least 1.6 to 1.0, (iv)
      a
      project life coverage ratio of at least 2.0 to 1.0 and (v) a minimum reserve
      tail. We are also required to maintain a certain minimum level of unrestricted
      cash. In addition, the Credit Facility restricts, among other things, our
      ability to incur additional debt, create liens on our property, dispose of
      any
      assets, merge with other companies or make any investments. A failure to comply
      with the restrictions contained in the Credit Facility could lead to an event
      of
      default thereunder which could result in an acceleration of such indebtedness.




3





***We
      are using reconditioned equipment which could adversely affect our cost
      assumptions and our ability to economically and successfully mine the
      project.***





We
      are
      using reconditioned carbon column collection equipment to recover gold and
      Sinergia, our mining contractor, is using equipment **** that
      is
      not new. Such equipment is subject to the risk of more frequent breakdowns
      and
      need for repair than new equipment. If the equipment that we or Sinergia uses
      breaks down and needs to be repaired or replaced, we will incur additional
      costs
      and operations may be delayed resulting in lower amounts of gold recovered.
      In
      such event, our capital and operating cost assumptions may be inaccurate and
      our
      ability to economically and successfully mine the project may be hampered,
      resulting in decreased revenues and, possibly, a loss from operations.





***The
      gold deposit we have identified at El Chanate is relatively low-grade. If our
      estimates and assumptions are inaccurate, our results of operation and financial
      condition could be materially adversely affected.***





The
      gold
      deposit we have identified at our El Chanate Project is relatively low-grade.
      If
      the estimates of ore grade or recovery rates contained in the feasibility study
      turn out to be higher than the actual ore grade and recovery rates, if costs
      are
      higher than expected, or if we experience problems related to the mining,
      processing, or recovery of gold from ore at the El Chanate Project, our results
      of operation and financial condition could be materially adversely affected.
      Moreover, it is possible that actual costs and economic returns may differ
      materially from our best estimates. It is not unusual in the mining industry
      for
      new mining operations to experience unexpected problems during the initial
      production phase and to require more capital than anticipated. There can be
      no
      assurance that our operations at El Chanate will be profitable.





***We
      have only one project. As a result, our chances of conducting viable mining
      operations are dependent upon the success of that
      project.***





Our
      only
      current properties are the El Chanate concessions. Accordingly, we are dependent
      upon the success of the El Chanate concessions.





***Gold
      prices can fluctuate on a material and frequent basis due to numerous factors
      beyond our control. If and when we commence production, our ability to generate
      profits from operations could be materially and adversely affected by such
      fluctuating prices.***





The
      profitability of any gold mining operations in which we have an interest will
      be
      significantly affected by changes in the market price of gold. Gold prices
      fluctuate on a daily basis. During the first nine months of 2007, the spot
      price
      for gold on the London Exchange has fluctuated between $608.30 and $743.00
      per
      ounce. During calendar 2006, the spot price for gold on the London Exchange
      fluctuated between $524.75 and $725.00 per ounce. Gold prices are affected
      by
      numerous factors beyond our control, including:





·
            the
                level of interest rates,


·
            the
                rate of inflation,


·
            central
                bank sales,




4




·
            world
                supply of gold and


·
            stability
                of exchange rates.




Each
      of
      these factors can cause significant fluctuations in gold prices. Such external
      factors are in turn influenced by changes in international investment patterns
      and monetary systems and political developments. The price of gold has
      historically fluctuated widely and, depending on the price of gold, revenues
      from mining operations may not be sufficient to offset the costs of such
      operations.





***We
      may not be successful in hedging against gold price and interest rate
      fluctuations and may incur mark to market losses and lose money through our
      hedging programs.*********





We
      have
      entered into metals trading transactions to hedge against fluctuations in gold
      prices, using call option purchases and forward sales, and have entered into
      various interest rate swap agreements. The terms of our Credit Facility with
      Standard Bank require that we utilize various price hedging techniques to hedge
      a portion of the gold we plan to produce at the El Chanate Project and hedge
      at
      least 50% of our outstanding loan balance. There can be no assurance that we
      will be able to successfully hedge against gold price and interest rate
      fluctuations.




Further,
      there can be no assurance that the use of hedging techniques will always be
      to
      our benefit. Hedging instruments that protect against metals market price
      volatility may prevent us from realizing the full benefit from subsequent
      increases in market prices with respect to covered production, which would
      cause
      us to record a mark-to-market loss, decreasing our revenues and profits. Hedging
      contracts also are subject to the risk that the other party may be unable or
      unwilling to perform its obligations under these contracts. Any significant
      nonperformance could have a material adverse effect on our financial condition,
      results of operations and cash flows.





We
      had
      not yet physically produced gold dore on March 31 and June 30, 2007, the first
      two quarters ended upon which we were required to settle a forward sale of
      5,285
      and 7,841 ounces of gold, respectively, with Standard Bank. Rather than
      modifying the original Gold Price Protection agreement with Standard Bank to
      satisfy these forward sale obligations, we opted for a net cash settlement
      between the call option purchase price of $535 and the forward sale price of
      $500, or $35.00 per oz. We paid Standard Bank approximately $185,000 and
      $274,000, respectively, due to these settlements with corresponding reductions
      in our derivative liability. As we commenced gold production in August 2007, we
      believe we will be able to deliver the quantity of gold required by our forward
      sales on a going forward basis; however, we again opted for a cash settlement
      for the quarter ended September 30, 2007 and may continue to net cash settle
      these forward sale obligations if, as on September 30, 2007, it is the most
      cost
      effective option for us. If we are unable for any reason to produce the quantity
      of gold required by our forward sales and generate sufficient cash flow to
      settle these forward sales in gold or cash, we could have a material adverse
      effect on our financial condition and cash flows.





***Our
      material property interests are in Mexico. Risks of doing business in a foreign
      country could adversely affect our results of operations and financial
      condition.***





We
      face
      risks normally associated with any conduct of business in a foreign country
      with
      respect to our El Chanate Project in Sonora, Mexico, including various levels
      of
      political and economic risk. The occurrence of one or more of these events
      could
      have a material adverse impact on our efforts or operations which, in turn,
      could have a material adverse impact on our cash flows, earnings, results of
      operations and financial condition. These risks include the
      following:





·
            labor
                disputes,




5




·
            invalidity
                of governmental orders,


·
            uncertain
                or unpredictable political, legal and economic
                environments,


·
            war
                and civil disturbances,


·
            changes
                in laws or policies,


·
            taxation,


·
            delays
                in obtaining or the inability to obtain necessary governmental
                permits,


·
            governmental
                seizure of land or mining claims,


·
            limitations
                on ownership,


·
            limitations
                on the repatriation of earnings,


·
            increased
                financial costs,


·
            import
                and export regulations, including restrictions on the export of gold,
                and


·
            foreign
                exchange controls.





These
      risks may limit or disrupt the project, restrict the movement of funds or impair
      contract rights or result in the taking of property by nationalization or
      expropriation without fair compensation.





***We
      sell gold in U.S. dollars; however, we incur a significant amount of our
      expenses in Mexican pesos. If applicable currency exchange rates fluctuate,
      our
      revenues and results of operations may be materially and adversely affected.***





We
      sell
      gold in U.S. dollars. We incur a significant amount of our expenses in Mexican
      pesos. As a result, our financial performance would be affected by fluctuations
      in the value of the Mexican peso to the U.S. dollar.





***Changes
      in regulatory policy could adversely affect our exploration and future
      production activities.***





Any
      changes in government policy may result in changes to laws
      affecting:





·
            ownership
                of assets,


·
            land
                tenure,


·
            mining
                policies,


·
            monetary
                policies,


·
            taxation,


·
            rates
                of exchange,


·
            environmental
                regulations,


·
            labor
                relations,


·
            repatriation
                of income and/or


·
            return
                of capital.





Any
      such
      changes may affect our ability to undertake exploration and development
      activities in respect of future properties in the manner currently contemplated,
      as well as our ability to continue to explore, develop and operate those
      properties in which we have an interest or in respect of which we have obtained
      exploration and development rights to date. The possibility, particularly in
      Mexico, that future governments may adopt substantially different policies,
      which might extend to expropriation of assets, cannot be ruled out.




6





***Compliance
      with environmental regulations could adversely affect our exploration and future
      production activities.***





With
      respect to environmental regulation, future environmental legislation could
      require:





·
            stricter
                standards and enforcement,


·
            increased
                fines and penalties for non-compliance,


·
            more
                stringent environmental assessments of proposed projects and


·
            a
                heightened degree of responsibility for companies and their officers,
                directors and employees.





There
      can
      be no assurance that future changes to environmental legislation and related
      regulations, if any, will not adversely affect our operations. We could be
      held
      liable for environmental hazards that exist on the properties in which we hold
      interests, whether caused by previous or existing owners or operators of the
      properties. Any such liability could adversely affect our business and financial
      condition.





***We
      have insurance against losses or liabilities that could arise from our
      operations. If we incur material losses or liabilities in excess of our
      insurance coverage, our financial position could be materially and adversely
      affected.***





Mining
      operations involve a number of risks and hazards, including:





·
            environmental
                hazards,


·
            industrial
                accidents,


·
            metallurgical
                and other processing,


·
            acts
                of God, and/or


·
            mechanical
                equipment and facility performance problems.





Such
      risks could result in:





·
            damage
                to, or destruction of, mineral properties or production
                facilities,


·
            personal
                injury or death,


·
            environmental
                damage,


·
            delays
                in mining,


·
            monetary
                losses and /or


·
            possible
                legal liability.





Industrial
      accidents could have a material adverse effect on our future business and
      operations. While we do not have insurance coverage on our processing plant,
      we
      anticipate obtaining such coverage when this plant is fully commissioned. We
      currently maintain general liability, auto and property insurance coverage.
      We
      cannot be certain that the insurance we have in place will cover all of the
      risks associated with mining or that we will be able to maintain insurance
      to
      cover these risks at economically feasible premiums. We also might become
      subject to liability for pollution or other hazards which we cannot insure
      against or which we may elect not to insure against because of premium costs
      or
      other reasons. Losses from such events may have a material adverse effect on
      our
      financial position.





7





***Calculation
      of reserves and metal recovery dedicated to future production is not exact,
      might not be accurate and might not accurately reflect the economic viability
      of
      our properties.***





Reserve
      estimates may not be accurate. There is a degree of uncertainty attributable
      to
      the calculation of reserves, resources and corresponding grades being dedicated
      to future production. Until reserves or resources are actually mined and
      processed, the quantity of reserves or resources and grades must be considered
      as estimates only. In addition, the quantity of reserves or resources may vary
      depending on metal prices. Any material change in the quantity of reserves,
      resource grade or stripping ratio may affect the economic viability of our
      properties. In addition, there can be no assurance that mineral recoveries
      in
      small scale laboratory tests will be duplicated in large tests under on-site
      conditions or during production.





***We
      are dependent on the efforts of certain key personnel and contractors to develop
      our El Chanate Project.  If we lose the services of these personnel and
      contractors and we are unable to replace them, our planned operations at our
      El
      Chanate Project may be disrupted and/or materially adversely
      affected.***





We
      are
      dependent on a relatively small number of key personnel, including but not
      limited to John Brownlie, Chief Operating Officer, who oversees the El Chanate
      Project, the loss of any one of whom could have an adverse effect on us. We
      are
      also dependent upon Sinergia to provide mining services.  Sinergia
      commenced mining operations on March 25, 2007, and transitioned from the
      pre-production to production phase of the mining contract in July 2007. 
Sinergia has mobilized its mining fleet to the site ; however, its mining fleet
      is not new. If we lose the services of our key personnel, or if Sinergia is
      unable to effectively maintain its fleet, our planned operations at our El
      Chanate Project may be disrupted and/or materially adversely
      affected.





***There
      are uncertainties as to title matters in the mining industry. We believe that
      we
      have good title to our properties; however, any defects in such title that
      cause
      us to lose our rights in mineral properties could jeopardize our planned
      business operations.***





We
      have
      investigated our rights to explore, exploit and develop our concessions in
      manners consistent with industry practice and, to the best of our knowledge,
      those rights are in good standing. However, we cannot assure that the title
      to
      or our rights of ownership in the El Chanate concessions will not be challenged
      or impugned by third parties or governmental agencies. In addition, there can
      be
      no assurance that the concessions in which we have an interest are not subject
      to prior unregistered agreements, transfers or claims and title may be affected
      by undetected defects. Any such defects could have a material adverse effect
      on
      us.





***Our
      ability to remain profitable long-term eventually will depend on our ability
      to
      find, explore and develop additional properties. Our ability to acquire such
      additional properties will be hindered by competition. If we are unable to
      acquire, develop and economically mine additional properties, we most likely
      will not be able to be profitable on a long-term
      basis.***





Gold
      properties are wasting assets. They eventually become depleted or uneconomical
      to continue mining. The acquisition of gold properties and their exploration
      and
      development are subject to intense competition. Companies with greater financial
      resources, larger staffs, more experience and more equipment for exploration
      and
      development may be in a better position than us to compete for such mineral
      properties. If we are unable to find, develop and economically mine new
      properties, we most likely will not be able to be profitable on a long-term
      basis.




8





***Our
      ability on a going forward basis to discover additional viable and economic
      mineral reserves is subject to numerous factors, most of which are beyond our
      control and are not predictable. If we are unable to discover such reserves,
      we
      most likely will not be able to be profitable on a long-term
      basis.***





Exploration
      for gold is speculative in nature, involves many risks and is frequently
      unsuccessful. Few properties that are explored are ultimately developed into
      commercially producing mines. As noted above, our long-term profitability will
      be, in part, directly related to the cost and success of exploration programs.
      Any gold exploration program entails risks relating to





·
            the
                location of economic ore bodies,


·
            development
                of appropriate metallurgical processes,


·
            receipt
                of necessary governmental approvals and


·
            construction
                of mining and processing facilities at any site chosen for mining.





The
      commercial viability of a mineral deposit is dependent on a number of factors
      including:





·
            the
                price of gold,


·
            the
                particular attributes of the deposit, such as its


·
            size,


·
            grade
                and


·
            proximity
                to infrastructure,


·
            financing
                costs,


·
            taxation,


·
            royalties,


·
            land
                tenure,


·
            land
                use,


·
            water
                use,


·
            power
                use,


·
            importing
                and exporting gold and


·
            environmental
                protection.





The
      effect of these factors cannot be accurately predicted.





**Risks
      related to ownership of our stock**





***Our
      stock price may be adversely affected if a significant amount of shares are
      sold
      in the public market.***





As
      of
      October 12, 2007, approximately 80.4 million shares of our common stock,
      constituted "restricted securities" as defined in Rule 144 under the Securities
      Act of 1933. We have registered more than half of these shares for public
      resale. In addition, we have registered 18.0 million shares
      of
      common stock issuable upon the exercise of outstanding warrants and options
      that, as of the date hereof, have not expired or been exercised. All of the
      foregoing shares, assuming exercise of all of the above options and warrants,
      would represent in excess of 50% of the then outstanding shares of our common
      stock. Registration
      of the shares permits the sale of the shares in the open market or in privately
      negotiated transactions without compliance with the requirements of Rule 144.
      To
      the extent the exercise price of the warrants or options is less than the market
      price of the common stock, the holders of the warrants are likely to exercise
      them and sell the underlying shares of common stock and to the extent that
      the
      exercise prices of these securities are adjusted pursuant to anti-dilution
      protection, the securities could be exercisable or convertible for even more
      shares of common stock.  We
      also may
      issue shares
      to be used to meet our capital requirements or use shares to compensate
      employees, consultants and/or directors. We are unable to estimate the amount,
      timing or nature of future sales of outstanding common stock. Sales of
      substantial amounts of our common stock in the public market could cause the
      market price for our common stock to decrease. Furthermore, a decline in the
      price of our common stock would likely impede our ability to raise capital
      through the issuance of additional shares of common stock or other equity
      securities.




9





***We
      do not intend to pay cash dividends in the near future.***





Our
      board
      of directors determines whether to pay cash dividends on our issued and
      outstanding shares. The declaration of dividends will depend upon our future
      earnings, our capital requirements, our financial condition and other relevant
      factors. Our board does not intend to declare any dividends on our shares for
      the foreseeable future. We anticipate that we will retain any earnings to
      finance the growth of our business and for general corporate purposes.





***Provisions
      of our Certificate of Incorporation, By-laws and Delaware law could defer a
      change of our management which could discourage or delay offers to acquire
      us.***





Provisions
      of our Certificate of Incorporation, By-laws and Delaware law may make it more
      difficult for someone to acquire control of us or for our stockholders to remove
      existing management, and might discourage a third party from offering to acquire
      us, even if a change in control or in management would be beneficial to our
      stockholders. For example, our Certificate of Incorporation allows us to issue
      different series of shares of common stock without any vote or further action
      by
      our stockholders and our Board of Directors has the authority to fix and
      determine the relative rights and preferences of such series of common stock.
      As
      a result, our Board of Directors could authorize the issuance of a series of
      common stock that would grant to holders the preferred right to our assets
      upon
      liquidation, the right to receive dividend payments before dividends are
      distributed to the holders of other common stock and the right to the redemption
      of the shares, together with a premium, prior to the redemption of other series
      of our common stock.





10


**Item
      2.** **Description
      of Property**





**El
      Chanate Properties - Sonora, Mexico**





Through
      our wholly-owned subsidiaries, Oro de Altar S. de R. L. de C.V. (“Oro”) and
      Minera Santa Rita S. de R.L. de C.V. (“MSR”), we own 100% of the following 16
      mining concessions, all of which are located in the Municipality of Altar,
      State
      of Sonora, United States of Mexico.





The
      16
      mining concessions are as follows:





**Concession
                Name**
            
            **Title
                No.**
            
            **Hectares**1
            San
                Jose
            
            200718
            
            96.00002
            Las
                Dos Virgen
            
            214874
            
            132.23503
            Rono
                I
            
            206408
            
            82.19024
            Rono
                3
            
            214224
            
            197.21805
            La
                Cuchilla
            
            211987
            
            143.34816
            Elsa
            
            212004
            
            2,035.39977
            Elisa
            
            214223
            
            78.47178
            Ena
            
            217495
            
            190.00009
            Eva
            
            212395
            
            416.896310
            Mirsa
            
            212082
            
            20.551811
            Olga
            
            212081
            
            60.589012
            Edna
            
            212355
            
            24.043113
            La
                Tira
            
            219624
            
            1.797514
            La
                Tira 1
            
            219623
            
            18.608715
            Los
                Tres
            
            223634
            
            8.00016
            El
                Charro
            
            206404
            
            40.0000**Total**
            
            
            
            3,543.3491





At
      the El
      Chanate Project we are mining on two concessions, San Jose and Las Dos Virgens.
      We are utilizing four other concessions for processing mined ores. In the
      future, we plan to explore some or all of these concessions to determine whether
      or not further activity is warranted.




11










Until
      August 2006, we were following an August 2003 feasibility study (the “2003
      Study”) prepared by M3 Engineering of Tucson, Arizona (“M3”) as updated by M3 in
      October 2005 (The “2005 Study”). The 2005 Study used a base gold price of $375
      per ounce. In view of a significant rise in the gold price, in June 2006, we
      commissioned SRK Consulting, Denver, Colorado, to prepare an updated Canadian
      Securities Administration National Instrument 43-101 compliant technical report
      on our El Chanate Project. SRK completed this technical report in August 2006
      (the “2006 Update”).





In
      May
      2007, we completed an expanded 72-hole reverse circulation drilling campaign
      to
      identify additional proven and probable gold reserves at the El Chanate Project.
      The 72 holes totaled approximately 8,300 meters, and were positioned to fill
      in
      gaps in the ore body and test the outer limits of the currently known ore zones.
      We turned the assay data over to Independent Mining Consultants, Inc. (“IMC”) of
      Tucson, AZ to update our ore reserve and our mine plan. On August 30, 2007,
      IMC
      delivered to us an updated resource block model and an updated mine plan and
      mine production schedule (the “2007 Report”).





According
      to the 2007 Report, our proven and probable reserve tonnage has increased to
      39.5 million metric tonnes with a gold grade of 0.66 grams per tonne (43.5
      million US short tons at 0.019 ounces per ton). The open pit stripping ratio
      is
      0.6:1 (0.6 tonnes of waste to one tonne of ore). The updated pit design for
      the
      revised plan in the 2007 Report is based on a plant recovery of gold that varies
      by rock types, but is expected to average 66.8%. A gold price of US$550 (three
      year average as of July 31, 2007 as determined by IMC) per ounce was used to
      re-estimate the reserves compared with a gold price of $450 per ounce used
      in
      the 2006 Update.




12





Gold
      production at El Chanate is currently near the feasibility study rate of 4,000
      ounces per month. We plan to slowly start to ramp up daily tonnage levels from
      7,500 tonnes per day (“tpd”) to 10,000 tpd. This should boost our gold
      production toward 5,000 ounces per month (60,000 ounces per year). Initially,
      we
      anticipate that the increased plant throughput will not require any capital
      since an additional ore crushing and stacking capacity was factored into the
      original design.





With
      the
      recent reserve increase, we are analyzing what steps are necessary to
      effectively increase production rates to 100,000 ounces per year and improve
      gold recoveries by conducting further metallurgical test work at our laboratory
      facilities at the mine. To this end, we have contacted Golder Engineering to
      supply EPCM (engineering, procurement and construction management) services
      for
      leach pad expansion and to study the impact of the planned mining increase.
      In
      addition, we are discussing options available with the crusher manufacturer,
      Excel Machinery, with regards to adding an additional secondary crusher into
      the
      crushing circuit, to enable the system to handle increased tonnage. We
      anticipate that another crusher should move daily tonnage up closer to 14,000
      tpd.





The
      following Summary is extracted from the 2007 Report. Please note that the
      reserves as stated are an estimate of what can be economically and legally
      recovered from the mine and, as such, incorporate losses for dilution and mining
      recovery. **** The
      832,280 ounces of contained gold represents ounces of gold contained in ore
      in
      the ground, and therefore does not reflect losses in the recovery process.
      Total
      gold produced is estimated to be 555,960 ounces, or approximately 66.8% of
      the
      contained gold. The gold recovery rate is expected to average approximately
      66.8% for the entire ore body. Individual portions of the ore body may
      experience varying recovery rates ranging from about 73% to 48%. Oxidized and
      sandstone ore types may have recoveries of about 73%; fault zone ore type
      recoveries may be about 64%; siltstone ore types recoveries may be about 48%
      and
      latite intrusive ore type recoveries may be about 50%.





El
      Chanate Project





**Production
      Summary**





Metric
            
            U.S.**Materials**
              **Reserves**
              Proven
              Probable
              Total
                Reserves
              **Waste**
              Total
              
              Contained
                Gold
              
              **Production**
              Ore
                Crushed**
              
              
              Operating
                Days/Year
              Gold
                Plant Average Recovery
              Average
                Annual Production**
              Total
                Gold Produced
            
            26.7
                Million Tonnes @ 0.68 g/t*
              12.8
                Million Tonnes@0.61g/t*
              39.5
                Million Tonnes @ 0.66 g/t*
              24.1
                Million Tonnes
              63.6
                Million Tonnes
              
              25.89
                Million grams
              
              
              2.6
                Million Tonnes /Year
              7,500
                Mt/d
              
              365
                Days per year
              66.8
                %
              1.35
                Million grams
              17.29
                Million grams
            
            29.4
                Million Tons @ 0.0198 opt*
              14.1
                Million Tons@0.0179opt*
              43.5
                Million Tons @ 0.0192 opt*
              26.6
                Million Tons
              70.1
                Million tons
              
              832,280
                Oz
              
              
              2.87
                Million Tons/Year
              8,267
                t/d
              
              365
                Days per year
              66.8
                %
              43,414
                Oz
              555,960
                Oz




*
“g/t”
      means grams per metric tonne, “opt” means ounces per ton, “Mt/d” means metric
      tonnes per day and “t/d” means tons per day. The reserve estimates are based on
      a recovered gold cutoff grade of 0.17 to 0.21 grams per metric tonne, depending
      on the operating year, and as described below.




13





**
      Based
      on mining rate of 7,500 metric tonnes per day of ore. Does not take into account
      the anticipated increase to 10,000 metric tonnes per day or more.




In
      the
      mineral resource block model developed, with blocks 6m (meters) x 6m x 6m high,
      Measured and Indicated resources (corresponding to Proven and Probable reserves
      respectively when within the pit design) were classified in accordance with
      the
      following scheme:




·
            Blocks
                with 2 or more drill holes within a search radius of 80m x 70m x
                40m and
                with a relative kriging (a geostatistical calculation technique)
                standard
                deviation less than or equal to 0.45 were classified as Measured
                (corresponding to Proven);




·
            Blocks
                with 1 hole within the search radius of 80m x 70m x 40m and with
                a
                relative kriging standard deviation of 0.60 or less, blocks with
                2 holes
                and a kriging standard deviation of 0.70 or less, blocks with 3 holes
                and
                a kriging standard deviation of 0.80 or less, blocks with 4 holes
                and a
                relative kriging standard deviation of 0.90 or less and all blocks
                with 5
                or more holes within the search radius were classified as Indicated
                (corresponding to Probable), unless they met the above criterion
                for
                Proven;




·
            Blocks
                with a grade estimate that did not meet the above criteria were classified
                as Inferred (and which was classed as waste material in the mining
                reserves estimate);




·
            Blocks
                outside the above search radii or outside suitable geological zones
                were
                not assigned a gold grade or a resource
                classification.




14




The
      proven and probable reserve estimates are based on a recovered gold cutoff
      grade
      of 0.17 to 0.21 grams/tonne, depending on the operating year. The variation
      is
      due to balancing the mine and plant production capacities on a year by year
      basis for the plan. (A recovered gold cutoff grade was used for reserves
      calculation as the head gold grade cutoff varies with the different ore types
      due to their variable gold recoveries.) The internal (in-pit) and break even
      cutoff grade calculations are as follows:





**Cutoff
                Grade Calculation**
              **Basic
                Parameters**
              Gold
                Price
              Shipping
                and Refining
              Gold
                Recovery
              Royalty
              
              **Operating
                Costs per Tonne of Ore**
              Mining
                *
              Processing/Leach
                Pad
              G&A
              Total
              
              **Internal
                Cutoff Grade**
              Head
                Grade Cutoff (66.8% recov.)
              Recovered
                Gold Grade Cutoff
            **Internal
                Cutoff Grade**
              
              US$550/oz
              US$
                4.14/oz
              66.8%
              4%
                of NSR
              
              $
                per Tonne of Ore
              0.070
              1.980
              0.800
              2.850
              
              Grams
                per Tonne
              0.25
              0.17
            **Break
                Even Cutoff Grade**
              
              US$550/oz
              US$
                4.14/oz
              66.8%
              4%
                of NSR
              
              $
                per Tonne of Ore
              1.360
              1.980
              0.800
              4.140
              
              Grams
                per Tonne
              0.37
              0.25







*
      The
      calculation of an internal cutoff grade does not include the basic mining costs
      (which are considered to be sunk costs for material within the designed pit).
      The $0.07 per tonne cost included is the incremental (added) cost of hauling
      ore
      over hauling waste, and which is included in the calculation.





Surface
      Property Ownership





Anglo
      Gold purchased surface property ownership, consisting of 466 Hectares in Altar,
      Sonora, on January 27, 1998. The ownership was conveyed to our subsidiary,
      Oro
      de Altar S.A. de C.V., in 2002. MSR, one of our wholly-owned Mexican affiliates,
      has a lease on the property for the purpose of mining the Chanate gold deposit.
      The purchase transaction was recorded as public deed 19,591 granted by Mr.
      Jose
      Maria Morera Gonzalez, Notary Public 102 of the Federal District, registered
      at
      the Public Registry of Property of Caborca, Sonora, under number 36026, book
      one, volume 169 of the real estate registry section on May 7, 1998.





General
      Information and Location





The
      El
      Chanate Project is located in the State of Sonora, Mexico, 37 kilometers
      northeast of the town of Caborca. It is accessible by paved and all weather
      dirt
      roads typically traveled by pickup trucks and similar vehicles. Driving time
      from Caborca is approximately 40 minutes. Access from Caborca to the village
      of
      16 de September is over well maintained National highways. Beyond the 16 de
      September village, routes to the property are currently over well traveled
      gravel and sandy desert roads suitable for lightweight vehicles. We acquired
      rights for service road access from the village of 16 de September, and
      constructed this road.





The
      project is situated on the Sonora desert in a hot and windy climate, generally
      devoid of vegetation with the exception of cactus. The terrain is generally
      flat
      with immense, shallow basins, scattered rock outcropping and low rocky hills
      and
      ridges. The desert floor is covered by shallow, fine sediment, gravel and
      caliche. The main body of the known surface gold covers and irregularly shaped
      area of approximately 3,170 feet long by 1,590 feet wide. Several satellite
      mineral anomalies exist on surfaces which have not been thoroughly explored.
      Assays on chip samples taken from trenches at these locations by us **** indicate
      the presence of gold mineralization.




15





In
      2005,
      we acquired 15 year rights of way for the current access road, and we acquired
      the right to purchase 81 hectares of land near the main highway. We have use
      of
      the land; however, our actual purchase of the land is conditioned upon the
      Ejido
      (local cooperative) privatizing the land, before the acquisition is finalized.
      We subsequently purchased an extension of our rights-of-way from 15 to 30 years.
      In addition to this road, we acquired a water concession, and our water well
      is
      located within a large regional aquifer. The 2005 feasibility study indicated
      our average life of mine water requirements, for ore processing only, will
      be
      about 94.6 million gallons per year (11.4 liters per second). The amount of
      water we were permitted to pump for our operations was approximately 71.3
      million gallons per year (8.6 liters per second). In September 2007, and in
      conjunction with the results of the 2007 Report, we acquired additional water
      rights which permits us to consume up to 109.1 million gallons per year. Based
      on the anticipated water consumption for the life of mine, we believe that
      we
      have an allocation to meet our requirements.





In
      December 2005, MSR entered
      into a Mining Contract with a Mexican mining contractor, Sinergia Obras Civiles
      y Mineras, S.A. de C.V. (“Contractor”). The Mining Contract, as amended, became
      effective November 1, 2006 and work commenced on or about March 25, 2007 (the
      “Commencement Date”). Pursuant to an amendment to the Mining Contract, the
      mining rates set forth in that contract are subject to adjustment for the rate
      of inflation between September 23, 2005 and the Commencement Date. We are
      currently in negotiations with the Contractor on an adjustment to these rates
      for the aforementioned period. Pursuant to the Mining Contract, the Contractor,
      using its own equipment, is supposed to perform all of the mining work (other
      than crushing) at the El Chanate Project for the life of the mine. MSR delivered
      to the Contractor a mobilization payment of $70,000 and the advance payment
      of
      $520,000. The advance payments are recoverable by MSR out of 100% of subsequent
      payments due to the Contractor under the Mining Contract. Pursuant to the Mining
      Contract, upon termination, the Contractor would be obligated to repay any
      portion of the advance payment that had not yet been recouped. The Contractor’s
      mining rates are subject to escalation on an annual basis. This escalation
      is
      tied to the percentage escalation in the Contractor’s costs for various parts
      for its equipment, interest rates and labor. One of the principals of the
      Contractor (“FG’s Successor”) is one of the former principals of Grupo Minero FG
      S.A. de C.V. (“FG”). FG was our former joint venture partner. In March 2007, we
      made a further advance to the Contractor of $319,000 in consideration of FG’s
      successors transfer to us of his remaining interest in MSR. See the discussion
      of FG in “ *Our
      Acquisition and Ownership of the El Chanate Project* ”
below.





The
      general El Chanate mine area has been mined for gold since the early
      19 th century.
      A number of old underground workings exist characterized by narrow shafts,
      to a
      depth of several tens of feet and connecting drifts and cross cuts. No
      information exists regarding the amount of gold taken out; however, indications
      are that mining was conducted on a small scale.





Geology





The
      project area is underlain by sedimentary rocks of the Late Jurassic - Early
      Cretaceous Bisbee Group, and the Late Cretaceous Chanate Group, which locally
      are overlain by andesites of the Cretaceous El Charro volcanic complex. The
      sedimentary strata are locally intruded by andesitic sills and dikes, a
      microporphyritic latite and by a diorite stock. The sedimentary strata are
      comprised of mudstone, siltstone, sandstone, conglomerate, shale and limestone.
      Within the drilled resource area, a predecessor exploration company
      differentiated two units on the basis of their position relative to the Chanate
      fault. The upper member is an undifferentiated sequence of sandstone,
      conglomerate and lesser mudstone that lies above the Chanate fault and it is
      assigned to the Escalante Formation of the Middle Cretaceous Chanate Group.
      The
      lower member is comprised of mudstone with mixed in sandstone lenses and thin
      limestone interbreds; it lies below the Chanate fault and is assigned to the
      Arroyo Sasabe Formation of the Lower Cretaceous Bisbee Group. The Arroyo Sasabe
      formation overlies the Morita Formation of the Bisbee Group. Both the Escalante
      and Arroyo Sasabe formations are significantly mineralized proximal to the
      Chanate fault, while the Morita Formation is barren.




16





The
      main
      structural feature of the project area is the Chanate fault, a 7 km long
      (minimum) northwest-striking, variably southwest-dipping structure that has
      been
      interpreted to be a thrust fault. The Chanate fault is overturned
      (north-dipping) at surface, and is marked by brittle deformation and shearing
      which has created a pronounced fracture foliation and fissility in the host
      rocks. In drill holes the fault is often marked the presence of an andesite
      dike. Reports prepared by a predecessor exploration company describe the fault
      as consisting of a series of thrust ramps and flats; however, geologic cross
      sections which we have reviewed but did not prepare may negate this
      interpretation.





Alteration/Mineralization





A
      predecessor exploration company has defined a 600 meter long, 300 meter wide,
      120 meter thick zone of alteration that is centered about the Chanate fault.
      The
      strata within this zone have been silicified and pyritized to varying degrees.
      In surface outcrop the mineralized zone is distinguished by its bleached
      appearance relative to unmineralized rock. The mineralized zone contains only
      single digit ppm (parts per million) levels of gold. Dense swarms of veinlets
      form thick, mineralized lenses, within a larger area of sub-economic but
      anomalous gold concentrations. Drill hole data indicates that the mineralized
      lenses are sub-horizontal to gently southwest-dipping and are grossly parallel
      to the Chanate fault. The fault zone itself is also weakly mineralized, although
      strata in the near hanging wall and footwall are appreciably mineralized.





Our
      Acquisition and Ownership of the El Chanate Project





In
      June
      2001, we purchased 100% of the issued and outstanding stock of Minera Chanate,
      S.A. de C.V. from AngloGold North America Inc. and AngloGold (Jerritt Canyon)
      Corp. Minera Chanate’s assets at the time of the closing of the purchase
      consisted of 106 exploitation and exploration concessions in the States of
      Sonora, Chihuahua and Guerrero, Mexico. By June 2002, after property reviews
      and
      to minimize tax payments, the 106 had been reduced to 12 concessions. To cover
      certain non-critical gaps between concessions, four new concessions were
      located, and the number of concessions is now 16. These concessions are
      contiguous, totaling approximately 3,543 hectares (8,756 acres or 13.7 square
      miles). Although there are 16 concessions, we are only mining two of these
      concessions at the present time. We also own outright 466 hectares (1,151 acres
      or 1.8 square miles) of surface rights at El Chanate and no third party
      ownership or leases exist on this fee land or the El Chanate concessions. In
      the
      future, assuming adequate funding is available, we plan on conducting
      exploration activities on some of the other concessions.





Pursuant
      to the terms of the agreement with Anglo Gold, in December 2001, we made a
      $50,000 payment to AngloGold. AngloGold will be entitled to receive the
      remainder of the purchase price by way of an ongoing percentage of net smelter
      returns of between 2% and 4% plus a 10% net profits interest (until the total
      net profits interest payment received by AngloGold equals $1,000,000).
      AngloGold's right to a payment of a percentage of net smelter returns and the
      net profits interest will terminate at such point as they aggregate $18,018,355.
      In accordance with the agreement, the foregoing payments are not to be construed
      as royalty payments. Should the Mexican government or other jurisdiction
      determine that such payments are royalties, we could be subjected to and would
      be responsible for any withholding taxes assessed on such payments.




17





Under
      the
      terms of the agreement, we have granted AngloGold the right to designate one
      of
      its wholly-owned Mexican subsidiaries to receive a one-time option to purchase
      51% of Minera Chanate (or such entity that owns the El Chanate concessions
      at
      the time of option exercise). That option is exercisable over a 180 day period
      commencing at such time as we notify AngloGold that we have made a good faith
      determination that we have gold-bearing ore deposits on any one of the
      identified groups of El Chanate concessions, when aggregated with any ore that
      we have mined, produced and sold from such concessions, of in excess of
      2,000,000 troy ounces of contained gold. The exercise price would equal twice
      our project costs on the properties during the period commencing on December
      15,
      2000 and ending on the date of such notice. After taking into account the
      results of the 2007 Report, our total resource at El Chanate remains below
      the
      2,000,000 troy ounces of contained gold.





In
      February 2002, MSR, one of our wholly-owned Mexican affiliates, now the leasee
      of the El Chanate concessions, as discussed below, entered into a joint venture
      agreement with Grupo Minero FG S.A. de C.V. (“FG”) to explore, evaluate and
      develop the El Chanate concessions. Effective March 31, 2004, this joint venture
      agreement was terminated. In consideration of FG’s contributions to the venture
      of $457,455, we issued to FG 2,000,000 restricted shares of our common stock
      valued at $800,000 and MSR issued to FG a participation certificate entitling
      FG
      to receive five percent of the MSR’s annual dividends, when declared. The
      participation certificate also gave FG the right to participate, but not to
      vote, in the meetings of MSR’s Board of Managers, Technical Committee and
      Partners. In August 2006, we repurchased the participation certificate from
      FG’s
      successor (“FG’s successor”) for $500,000 with FG’s successor retaining a 1% net
      profits interest in MSR, payable only after a total $20 million in net profits
      has been generated from operations at El Chanate. We repurchased the remaining
      1% net profits interest from FG’s successor in March 2007. FG’s successor also
      received a right of first refusal to carry out the works and render construction
      services required to effectuate the El Chanate Project. This right of first
      refusal was not applicable where a funding source for the project determines
      that others should render such works or services. As discussed above, FG’s
      successor is a principal of Sinergia, our mining contractor.





FG
      assigned or otherwise transferred to MSR all permits, licenses, consents and
      authorizations (collectively, “authorizations”) for which FG had obtained in its
      name in connection with the development of the El Chanate Project to the extent
      that the authorizations were assignable. To the extent that the authorizations
      were not assignable or otherwise transferable, FG gave its consent for the
      authorizations to be cancelled so that they can be re-issued or re-granted
      in
      MSR’s name. The foregoing has been completed.





During
      March 2002, prior to the sale of Minera Chanate and pursuant to the FG joint
      venture agreement, Minera Chanate, in a series of transactions, sold all of
      its
      surface land and mining claims to Oro de Altar S. de R. L. de C.V. ("Oro"),
      another of our wholly-owned subsidiaries. Oro, in turn, leased the foregoing
      land and mining claims to Minera Santa Rita.





**Item
      3.** **Legal
      Proceedings**





We
      are
      not presently a party to any material litigation.





18





**Item
      4.** **Submission
      of Matters to a Vote of Security Holders** ****





No
      matters were submitted to a vote of our shareholders during the fourth quarter
      of fiscal 2006.





**PART
      II**





**Item
      5.** **Market
      for Common Equity, Related Stockholder Matters and Small Business Issuer
      Purchases of Equity Securities** **.**





(a)
      Marketing Information — The principal
      U.S. market in which our common shares (all of which are of one class, $.0001
      par value Common Stock) are traded or will trade is in the over-the-counter
      market (Bulletin Board Symbol: "CGLD"). Our stock is not traded or quoted on
      any
      Automated Quotation System.





The
      following table sets forth the range of high and low closing bid quotes of
      our
      Common Stock per quarter for the past two fiscal years as reported by the OTC
      Bulletin Board (which reflect inter-dealer prices without retail mark-up,
      mark-down or commission and may not necessary represent actual transactions).





MARKET
      PRICE OF COMMON STOCK




Quarter
              Ending
            
            High
                and LowJuly
                31, 2007
            
            
            0.47
            
            
            0.38April
                30, 2007
            
            
            0.47
            
            
            0.37January
                31, 2007
            
            
            0.41
            
            
            0.31October
                31, 2006
            
            
            0.33
            
            
            0.28July
                31, 2006
            
            
            0.43
            
            
            0.32April
                30, 2006
            
            
            0.39
            
            
            0.33January
                31, 2006
            
            
            0.42
            
            
            0.28October
                31, 2005
            
            
            0.27
            
            
            0.17





As
      of
      March 22, 2006, our Common Stock began trading on the Toronto Stock Exchange
      under the symbol "CGC." The high and low trading prices for our Common stock
      for
      the periods indicated below are as follows:





Period
              Ending
            
            High
                and LowUS$/CDN$
            
            US$/CDN$Quarter
                ended July 31, 2007
            
            
            0.50/0.54
            
            
            0.35/0.37Quarter
                ended April 30, 2007
            
            
            0.52/0.60
            
            
            0.36/0.42Quarter
                ended January 31, 2007
            
            
            0.42/0.49
            
            
            0.27/0.31Quarter
                ended October 31, 2006
            
            
            0.36/0.40
            
            
            0.28/0.32Quarter
                ended July 31, 2006
            
            
            0.49/0.55
            
            
            0.28/0.32March
                22 2006 - April 30, 2006
            
            
            0.44/0.50
            
            
            0.33/0.37




19




(b)
      Holders — The approximate number of record holders of our Common Stock, as of
      October 12, 2007 amounts to 1,964 inclusive of those brokerage firms and/or
      clearing houses holding our common shares for their clientele (with each such
      brokerage house and/or clearing house being considered as one holder). The
      aggregate number of shares of Common Stock outstanding is 171,743,648 as of
      October 12, 2007 **.**





(c)
      Dividends — We had not paid or declared any cash dividends upon our Common Stock
      since inception and, by reason of our present financial status and our
      contemplated financial requirements, do not contemplate or anticipate paying
      any
      cash dividends upon our Common Stock in the foreseeable future.





In
      May
      2007, we issued an aggregate of 620,455 shares upon the exercise of options
      by
      our officers and directors for approximate gross proceeds of $137,000 as
      follows: 70,455 shares to Gifford A. Dieterle, 50,000 shares to Jeffrey W.
      Pritchard, and 250,000 shares each to Roger A. Newell and the wife of Robert
      Roningen.





On
      June
      13, 2007, we issued an additional 500,000 options to Mr. Chipman under our
      2006
      Equity Incentive Plan. These options vested immediately and are exercisable
      for
      a period of two years at an exercise price of $0.384 per share.





During
      the quarter ended July 31, 2007, we issued an aggregate of 1,221,000 shares
      of
      stock upon the exercising of common stock purchase warrants for approximate
      gross proceeds of $320,000. Subsequent to the end of the quarter, we issued
      an
      aggregate of 3,570,500 shares of stock upon the exercising of common stock
      purchase warrants for approximate gross proceeds of $1,106,000.





We
      issued
      the following two year options under our 2006 Equity Incentive Plan in August
      2007, subsequent to the end of the quarter, with exercise prices equal to or
      greater than the market price on date of issuance: 275,000 options exercisable
      at $.427, 150,000 options exercisable at $.50 and 40,000 options issuable at
      $.38.





All
      of
      the foregoing issuances were exempt from registration pursuant to the provisions
      of Section 4(2) of the Securities Act of 1933.





We
      did
      not repurchase any of our securities during the fiscal year ended July 31,
      2007.




20





The
      following table gives information about our Common Stock that may be issued
      upon
      the exercise of options, warrants and rights under all of our equity
      compensation plans as of July 31, 2007.


Number
                  of Securities to be issued upon exercise of outstanding options,
                  warrants
                  and rights
              
              Weighted-averageExercise
                  price ofOutstanding
                  options,warrants
                  and rights
              
              Number
                  of securities Remaining available for future issuance under equity
                  compensation plans (excluding securities reflected in column
                  (a))Plan
                  Category(a)
              
              (b)
              
              (c)Equity
                  compensation plans approved by security holders:
              
              
              1,050,000
              
              $
              0.38
              
              
              8,450,000Equity
                  compensation plans not approved by security holders:
              
              
              23,985,542
              
              $
              0.33
              
              
              N/ATotal
              
              
              25,035,542
              
              $
              0.33
              
              
              8,450,000




**Item
      6.** **Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations** **.**





You
      should read the following discussion and analysis of our financial condition
      and
      results of operations in conjunction with our financial statements and related
      notes included elsewhere in this report.





**Result
      of Operations**




The
      following discussion relates to the two fiscal years ended July 31, 2007. As
      disclosed in greater detail elsewhere in this report, we commenced mining
      operations and began to receive operating revenues in August 2007, shortly
      after
      the end of the fiscal year ended July 31, 2007.





Fiscal
      year ended July 31, 2007 compared to fiscal year ended July 31,
      2006





Net
      Loss





Our
      net
      loss for the fiscal year ended July 31, 2007 was approximately $7,472,000,
      an
      increase of approximately $2,667,000 or 56% from the fiscal year ended July
      31,
      2006. As discussed below, the primary reasons for the increase in loss during
      the fiscal year ended July 31, 2007 were: 1) an increase in selling, general
      and
      administrative expenses of approximately $625,000; 2) an increase in
      depreciation and amortization expense of approximately $  852,000;
      3) an increase in exploration expenditures of approximately $808,000; 4) an
      increase in losses of approximately $644,000 due to the change in fair value
      of
      our derivative instruments; and 5) an increase in interest expense of
      approximately $792,000. These increases in loss were slightly offset by a
      decrease in mine expenses of approximately $933,000 due to higher planning
      and
      engineering costs being expensed in the prior fiscal year. Net loss per share
      was $.05 and $.04 for the fiscal year ended July 31, 2007 and 2006,
      respectively.





21




Revenues





We
      generated no revenues from mining operations during the fiscal year ended July
      31, 2007 and 2006. There were de minimis non-operating revenues during the
      fiscal year ended July 31, 2007 and 2006 of approximately $146,000 and
      $184,000  ,
      respectively. These non-operating revenues primarily represent interest
      income.





Mine
      Expenses





Mine
      expenses during the fiscal year ended July 31, 2007 were $1,008,000, a decrease
      of $933,000 or 48% from the fiscal year ended July 31, 2006. Mine expenses
      were
      lower in 2007 versus the same period a year earlier primarily due to higher
      engineering and planning costs related to our El Chanate Project being expensed
      in the prior period.





Selling,
      General and Administration Expense





Selling,
      general and administrative expenses during the fiscal year ended July 31, 2007
      were $2,760,000, an increase of approximately $625,000 or 29% from the fiscal
      year ended July 31, 2006. The increase in selling, general and administrative
      expenses resulted primarily from higher salaries and wages, higher professional
      and consulting fees as well as an increase in insurance costs versus the same
      period a year earlier.





Equity
      Based Compensation





Equity
      based compensation during the fiscal year ended July 31, 2007 was $133,000
      as
      compared to $89,000 in costs for the same period a year earlier. This increase
      primarily resulted from the issuance of stock options to our independent
      directors, SEC counsel, and outside Canadian Counsel as well as an issuance
      of
      shares of common stock to an independent contractor for services provided
      related to our El Chanate project.





Exploration
      Expense





Exploration
      expense during the fiscal year ended July 31, 2007 and 2006 was approximately
      $808,000 and $0, respectively. The primary reason for the increase can be
      attributed to our 72-hole drilling campaign to determine additional proven
      and
      probable gold reserves at the El Chanate Project.





Depreciation
      and Amortization





Depreciation
      and amortization expense during the fiscal year ended July 31, 2007 and 2006
      was
      approximately $891,000 and $39,000, respectively. The primary reason for the
      increase was due to amortization charges on deferred financing costs resulting
      from the Credit Facility entered into in August 2006 with Standard Bank Plc.
      This accounted for approximately $876,000 of the amortization expense during
      the
      fiscal year ended July 31, 2007.





Other
      Income and Expense





Our
      loss
      on the change in fair value of derivative instruments during the fiscal year
      ended July 31, 2007 and 2006, was approximately $1,226,000 and $582,000,
      respectively. **** This
      was
      primarily due to us entering into two identically structured derivative
      contracts with Standard Bank in March 2006. Each derivative consisted of a
      series of forward sales of gold and a purchase gold cap. We agreed to sell
      a
      total volume of 121,927 ounces of gold forward to Standard Bank at a price
      of
      $500 per ounce on a quarterly basis during the period from March 2007 to
      September 2010. We also agreed to a purchase gold cap on a quarterly basis
      during this same period and at identical volumes covering a total volume of
      121,927 ounces of gold at a price of $535 per ounce. While the period of the
      derivative contracts has commenced, we do not anticipate any material adverse
      effect from the fact that we have not commenced to sell gold because the price
      of gold is substantially above $535 per ounce. Under FASB Statement No. 133,
      “Accounting for Derivative Instruments and Hedging Activities” (“FAS 133”),
      these contracts must be carried on the balance sheet at their fair value, with
      changes to the fair value of these contracts reflected as *Other
      Income or Expense.* These
      contracts were not designated as hedging derivatives; and therefore, special
      hedge accounting does not apply.




22





The
      first
      derivative was entered into on March 1, 2006 for a premium of $550,000; and
      the
      second was entered into on March 30, 2006 for a premium of $250,000. The gold
      price rose sharply in the second quarter 2006, and was the primary reason for
      the decrease in premium on the derivative contracts. The change in fair value
      during the fiscal year ended July 31, 2007 reduced the carrying value on these
      derivative contracts by approximately $1,226,000, and was reflected as an other
      expense during the 2007 period.





Interest
      expense was approximately $792,000 for the fiscal year ended July 31, 2007
      compared to $0 for the same period in 2006. This increase was mainly due to
      interest expense associated with our outstanding balances on our draw downs
      associated with the Credit Facility entered into in August 2006 with Standard
      Bank Plc related to project costs for our El Chanate Project.





**Changes
      in Foreign Exchange Rates**





During
      the fiscal year ended July 31, 2007, we recorded equity adjustments from foreign
      currency translations of approximately $205,000. These translation adjustments
      are related to changes in the rates of exchange between the Mexican Peso and
      the
      US dollar and are included as a component of other comprehensive
      income.





**Liquidity
      and Capital Resources; Plan of Operations**





As
      of
      July 31, 2007, we had working capital of approximately $6,343,000, a decrease
      of
      $689,000 as of July 31, 2006. Cash
      used
      in operating activities during the fiscal year ended July 31, 2007 was
      approximately $3,663,000, which primarily represents cash costs of our mining
      operation at El Chanate during the fiscal year ended July 31, 2007 . Cash
      used
      in investing activities during the fiscal year ended July 31, 2007, amounted
      to
      $18,425,000, primarily from the purchase and erection of property, plant and
      equipment related to our El Chanate Project. Cash provided by financing
      activities during the fiscal year ended July 31, 2007 amounted to $21,367,000,
      primarily from proceeds from our Credit Facility of $12,500,000 and
      approximately $9,129,000 in proceeds from the sale of common stock and exercise
      of warrants. With our recent reserve increase, our
      plans
      over the next 12 months primarily include: 1) the gradual ramp up of daily
      processing rates from 7,500 tonnes per day (tpd) to 10,000 tpd which should
      boost our gold production toward 5,000 ounces per month and 60,000 ounces per
      year; 2) looking to effectively increase production rates to 12,500 tpd and
      improve gold recoveries by conducting further metallurgical test work at our
      laboratory facilities at the mine; and 3) possible exploration and/or
      acquisitions in northern Mexico. We believe that the initial increase in
      production to 10,000 tpd would not require any significant capital investment
      since an additional ore crushing and stacking capacity had been factored into
      the original design. We are analyzing what steps are necessary to effectively
      increase production rates to 100,000 ounces per year. To this end, we have
      contacted Golder Engineering to supply EPCM (engineering, procurement and
      construction management) services for leach pad expansion and to study the
      impact of the planned mining increase. In addition, we are discussing options
      available with the crusher manufacturer, Excel Machinery, with regards to adding
      an additional secondary crusher into the crushing circuit, to enable the system
      to handle increased tonnage. We anticipate that another crusher should move
      daily tonnage up closer to 14,000 tpd. The estimated cost to achieve these
      increased production rates will be approximately $12,000,000 over a two year
      period. Management intends to fund these expansion costs through revenues from
      gold sales, obtaining additional bank financing and/or the sale of our
      securities; however, we cannot assure that adequate additional funding, if
      needed, will be available to fund this expansion activity.




23





We
      commenced mining operations in late March 2007 and achieved gold production
      and
      revenue from operations in early August 2007. During our first two months,
      we
      produced approximately 6,850 ounces of gold and 5,222 ounces of silver. Of
      this
      production, we sold 6,384 ounces of gold for proceeds amounting to approximately
      $4,380,000. We believe that our available funds in conjunction with anticipated
      revenues from gold sales will be adequate to cover operating activities at
      El
      Chanate and general and administrative expenses for the life of mine.




**January
      2007 Private Placements & Warrant Exercises and post fiscal year end Warrant
      Exercises**





We
      closed
      two private placements in January 2007 pursuant to which we issued an aggregate
      of 12,561,667 units, each unit consisting of one share of our common stock
      and a
      warrant to purchase 1⁄4 of a share of our common stock for proceeds of
      approximately $3,486,000, net of commissions of approximately $283,000. The
      Warrant issued to each purchaser in the January 2007 placements is exercisable
      for one share of our common stock, at an exercise price equal to $0.40 per
      share. Each Warrant has a term of eighteen months and is fully exercisable
      from
      the date of issuance. We issued to the placement agents eighteen month warrants
      to purchase up to an aggregate of 942,125 shares of our common stock at an
      exercise price of $0.30 per share. Such placement agent warrants are valued
      at
      approximately $142,000 using the Black-Scholes option pricing
      method.





We
      also
      received proceeds of approximately $5,643,000 during the year ended July 31,
      2007, from the exercise of an aggregate of 22,203,909 warrants issued in past
      private placements. Subsequent to the fiscal year ended July 31, 2007, we
      received proceeds of $1,106,000 from the exercise of an aggregate of 3,570,500
      warrants issued in past private placements.





**Project
      Finance Credit Facility**





In
      August
      2006, we entered into a credit facility (the “Credit Facility”) involving our
      wholly-owned subsidiaries MSR and Oro, as borrowers, us, as guarantor, and
      Standard Bank plc (“Standard Bank”), as the lender and the offshore account
      holder. Pursuant to the Credit Facility, MSR and Oro borrowed money in an
      aggregate principal amount of up to US$12.5 million (the “Loan”) for the purpose
      of constructing, developing and operating our El Chanate Project (the “Mine”).
      We have guaranteed the repayment of the Loan and the performance of the
      obligations under the Credit Facility. The Loan is scheduled to be repaid in
      fourteen quarterly payments with the first principal payment due after certain
      Mine start-up production and performance criteria are satisfied, which we
      believe will occur in the first calendar quarter of 2008. The Loan bears
      interest at LIBOR plus 4.00%, with LIBOR interest periods of 1, 2, 3 or 6 months
      and with interest payable at the end of the applicable interest
      period.




24




The
      Credit Facility contains covenants customary for a project financing loan,
      including but not limited to restrictions (subject to certain exceptions) on
      incurring additional debt, creating liens on our property, disposing of any
      assets, merging with other companies and making any investments. We are required
      to meet and maintain certain financial covenants, including (i) a debt service
      coverage ratio of not less than 1.2 to 1.0, (ii) a projected debt service
      coverage ratio of not less than 1.2 to 1.0, (iii) a loan life coverage ratio
      of
      at least 1.6 to 1.0, (iv) a project life coverage ratio of at least 2.0 to
      1.0
      and (v) a minimum reserve tail. We are also required to maintain a certain
      minimum level of unrestricted cash, and upon meeting certain Mine start-up
      production and performance criteria, MSR and Oro are required to maintain a
      specified amount of cash as a reserve for debt repayment. We believe that we
      are
      in compliance with these requirements to the extent that they have become
      effective.




The
      Loan
      is secured by all of the tangible and intangible assets and property owned
      by
      MSR and Oro pursuant to the terms of a Mortgage Agreement, a Non-Possessory
      Pledge Agreement, an Account Pledge Agreement and certain other agreements
      entered into in Mexico (the “Mexican Collateral Documents”). As additional
      collateral for the Loan, we, together with our subsidiary, Leadville Mining
      & Milling Holding Corporation, have pledged all of our ownership interest in
      MSR and Oro. In addition to these collateral arrangements, MSR and Oro are
      required to deposit all cash proceeds received from operations and other sources
      in an offshore, controlled account with Standard Bank. Absent a default under
      the loan documents, MSR and Oro may use the funds from this account for specific
      purposes such as approved project costs and operating costs.





As
      part
      of the fee for entering into and closing the Credit Facility, we issued to
      Standard Bank 1,150,000 shares of our restricted common stock and a warrant
      for
      the purchase of 12,600,000 shares of our common stock at an exercise price
      of
      $0.317 per share, expiring on the earlier of (a) December 31, 2010 or (b) the
      date one year after the repayment of the Credit Facility. We recorded the
      issuance of the 1,150,000 shares of common stock and 12,600,000 warrants as
      deferred financing costs of approximately $351,000 and $3,314,000, respectively,
      as a reduction of stockholders' equity on our balance sheet. The issuance of
      1,150,000 shares was recorded at the fair market value of our common stock
      at
      the closing date or $0.305 per share. The warrants were valued at approximately
      $3,314,000 using the Black-Scholes option pricing model and were reflected
      as
      deferred financing costs as a reduction of stockholders' equity on our balance
      sheet.





Previously,
      pursuant to the mandate and commitment letter for the facility, we issued to
      Standard Bank 1,000,000 shares of our restricted common stock and a warrant
      for
      the purchase of 1,000,000 shares of our common stock at an exercise price of
      $0.32 per share, expiring on the earlier of (a) December 31, 2010 or (b) the
      date one year after the repayment of the Credit Facility. During the fiscal
      year
      ended July 31, 2006, we recorded the issuance of the 1,000,000 shares of common
      stock as deferred financing costs of approximately $270,000 as a reduction
      of
      stockholders' equity on our balance sheet. The issuance of these shares was
      recorded at the fair market value of our common stock at the commitment letter
      date or $0.27 per share. In addition, the warrants were valued at approximately
      $253,000 using again the Black-Scholes option pricing model and were reflected
      as deferred financing costs as a reduction of stockholders' equity on our
      balance sheet as of July 31, 2006. We have registered for public resale the
      2,150,000 shares issued to Standard Bank and the 13,600,000 shares issuable
      upon
      exercise of warrants issued to Standard Bank. ****





In
      March
      2006, we entered into a gold price protection arrangement with Standard Bank
      to
      protect us against future fluctuations in the price of gold. We agreed to a
      series of gold forward sales and call option purchases in anticipation of
      entering into the Credit Facility. Under the price protection agreement, we
      have
      agreed to sell a total volume of 121,927 ounces of gold forward to Standard
      Bank
      at a price of $500 per ounce on a quarterly basis during the period from March
      2007 to September 2010. We will also purchase call options from Standard Bank
      on
      a quarterly basis during this same period covering a total volume of 121,927
      ounces of gold at a price of $535 per ounce. We paid a fee to Standard Bank
      in
      connection with the price protection agreement. In addition, we provided
      aggregate cash collateral of approximately $4.3 million to secure our
      obligations under this agreement. The cash collateral was returned to us after
      the Credit Facility was executed in August 2006.




25





Between
      October 11, 2006 and May 1, 2007, we drew down the full amount of $12,500,000
      from the Credit Facility with Standard Bank. We used substantially all of these
      proceeds for the development of our El Chanate Project. We also used some of
      these funds to repurchase of the 5% net profits interest formerly held by
      FG.





On
      October 11, 2006, prior to our initial draw on the Credit Facility, we entered
      into interest rate swap agreements in accordance with the terms of the Credit
      Facility, which requires that we hedge at least 50 percent of our outstanding
      debt under this facility. The agreements entered into cover $9,375,000 or 75%
      of
      the outstanding debt. Both swaps covered this same notional amount of
      $9,375,000, but over different time horizons. The first covered the six months
      that commenced on October 11, 2006 and terminated on March 31, 2007 and the
      second covers the period from March 30, 2007 through December 31, 2010. We
      intend to use discretion in managing this risk as market conditions vary over
      time, allowing for the possibility of adjusting the degree of hedge coverage
      as
      we deem appropriate. However, any use of interest rate derivatives will be
      restricted to use for risk management purposes.





While
      we
      believe that our available funds in conjunction with anticipated revenues from
      gold sales will be adequate to cover operating activities at El Chanate and
      general and administrative expenses for the life of the mine, if we encounter
      unexpected problems we may need to raise additional capital. We also may need
      to
      raise additional capital for significant property acquisitions and/or
      exploration activities. To the extent that we need to obtain additional capital,
      management intends to raise such funds through the sale of our securities and/or
      joint venturing with one or more strategic partners. We cannot assure that
      adequate additional funding, if needed, will be available . If
      we
      need additional capital and we are unable to obtain it from outside sources,
      we
      may be forced to reduce or curtail our operations or our anticipated exploration
      activities. Please see “ *We
      just recently started to receive cash flow from operations and, historically,
      have relied on external funding sources. While we believe that, with continuing
      cash flow from operations, we have adequate funds to permit us to reach positive
      cash flow from such operations, if we encounter unexpected problems and we
      are
      unable to generate positive cash flow in a timely manner, we may need to raise
      additional capital. If additional capital is required and we are unable to
      obtain it from outside sources, we may be forced to reduce or curtail our
      operations or our anticipated exploration activities.* ”
in
      “ *Risk
      Factors”* below.





**Environmental
      and Permitting Issues**





Management
      does not expect that environmental issues will have an adverse material effect
      on our liquidity or earnings. In Mexico, although we must continue to comply
      with laws, rules and regulations concerning mining, environmental, health,
      zoning and historical preservation issues, we are not aware of any significant
      environmental concerns or existing reclamation requirements at the El Chanate
      concessions. We received the required Mexican government permits for
      construction, mining and processing the El Chanate ores in January 2004. The
      permits were extended in June 2005. Pursuant to the extensions, once we file
      a
      notice that work has commenced, we have one year to prepare the site and
      construct the mine and seven years to mine and process ores from the site.
      We
      filed the notice on June 1, 2006. Once we revise our new mine plan based on
      the
      2007 Report, we will work to extend the permits for mining and processing for
      the new life of mine. We received the explosive permit from the government
      in
      August 2006. This permit, as extended, expires on December 31, 2007 and is
      renewable annually.




26





We
      own
      properties in Leadville, Colorado for which we have previously recorded an
      impairment loss. Part of the Leadville Mining District has been declared a
      federal Superfund site under the Comprehensive Environmental Response,
      Compensation and Liability Act of 1980, and the Superfund Amendments and
      Reauthorization Act of 1986. Several mining companies and one individual were
      declared defendants in a possible lawsuit. We were not named a defendant or
      Principal Responsible Party. We did respond in full detail to a lengthy
      questionnaire prepared by the Environmental Protection Agency ("EPA") regarding
      our proposed procedures and past activities in November 1990. To our knowledge,
      the EPA has initiated no further comments or questions.





We
      do
      include in all our internal revenue and cost projections a certain amount for
      environmental and reclamation costs on an ongoing basis. This amount was
      determined at a fixed amount of $0.13 per metric tonne of material to be mined
      on a continual, ongoing basis to provide primarily for reclaiming tailing
      disposal sites and other reclamation requirements. No assurance can be given
      that environmental regulations will not be changed in a manner that would
      adversely affect our planned operations. We estimated the reclamation costs
      for
      the El Chanate site to be approximately $2,300,000; however, we are in the
      process of determining the impact the increase in proven and probable reserve
      tonnage will have on reclamation and remediation costs on a going forward basis.
      Reclamation costs are allocated to expense over the life of the related assets
      and are periodically adjusted to reflect changes in the estimated present value
      resulting from the passage of time and revisions to the estimates of either
      the
      timing or amount of the reclamation and abandonment costs. The asset retirement
      obligation is based on when the spending for an existing environmental
      disturbance and activity to date will occur. We review, on an annual basis,
      unless otherwise deemed necessary, the asset retirement obligation at each
      mine
      site.





**Contractual
      Obligations as of July 31, 2007**





We
      occupy
      office space in New York City under a non-cancelable operating lease that
      commenced on September 1, 2007 and terminates on August 31, 2012. In addition
      to
      base rent, the lease calls for payment of utilities and other occupancy
      costs.





Approximate
      future minimum payments under this lease are as follows:


Fiscal
                  Years Ending July 31,2008
              
              $
              118,0002009
              
              
              128,0002010
              
              
              128,0002011
              
              
              128,0002012
              
              
              128,0002013
              
              
              11,000$
              641,000





Rent
      expense under the previous office lease in New York City was approximately
      $66,000 and $63,000 for the years ended July 31, 2007 and 2006,
      respectively.




27





**New
      Accounting Pronouncements**





We
      adopted the provisions of FASB Interpretation No. 48, "Accounting for
      Uncertainty in Income Taxes" ("FIN 48") effective January 1, 2007. The purpose
      of FIN 48 is to clarify and set forth consistent rules for accounting for
      uncertain tax positions in accordance with Statement of Financial Accounting
      Standards No. 109, "Accounting for Income Taxes". The cumulative effect of
      applying the provisions of this interpretation are required to be reported
      separately as an adjustment to the opening balance of retained earnings in
      the
      year of adoption. The adoption of this standard did not have an impact on the
      financial condition or the results of our operations.





On
      February 15, 2007, the FASB issued FASB Statement No. 159, The Fair Value Option
      for Financial Assets and Financial Liabilities - Including an Amendment of
      FASB
      Statement No. 115. This standard permits an entity to choose to measure many
      financial instruments and certain other items at fair value. This option is
      available to all entities. Most of the provisions in Statement 159 are elective;
      however, the amendment to FASB Statement No. 115, Accounting for Certain
      Investments in Debt and Equity Securities, applies to all entities with
      available-for-sale and trading securities. Some requirements apply differently
      to entities that do not report net income. The FASB's stated objective in
      issuing this standard is as follows: "to improve financial reporting by
      providing entities with the opportunity to mitigate volatility in reported
      earnings caused by measuring related assets and liabilities differently without
      having to apply complex hedge accounting provisions".





The
      fair
      value option established by Statement 159 permits all entities to choose to
      measure eligible items at fair value at specified election dates. A business
      entity will report unrealized gains and losses on items for which the fair
      value
      option has been elected in earnings (or another performance indicator if the
      business entity does not report earnings) at each subsequent reporting date.
      The
      fair value option: (a) may be applied instrument by instrument, with a few
      exceptions, such as investments otherwise accounted for by the equity method;
      (b) is irrevocable (unless a new election date occurs); and (c) is applied
      only
      to entire instruments and not to portions of instruments.





Statement
      159 is effective as of the beginning of an entity's first fiscal year that
      begins after November 15, 2007.  Early adoption is permitted as of the
      beginning of the previous fiscal year provided that the entity makes that choice
      in the first 120 days of that fiscal year and also elects to apply the
      provisions of FASB Statement No. 157, Fair Value Measurements.





**Disclosure
      About Off-Balance Sheet Arrangements**





On
      October 11, 2006, prior to the initial draw on our Credit Facility, we
      entered into interest rate swap agreements with total notional amounts of
      $18,750,000 in accordance with the terms of the Credit Facility. There was
      one
      six month swap contract totaling $9,375,000 (75% of the outstanding debt) with
      an effective date of October 11, 2006 and a termination date of March 31, 2007
      and one three-year and nine month swap contract totaling $9,375,000 (75% of
      the
      outstanding debt) with an effective date of March 30, 2007 and a termination
      date of December 31, 2010. These swaps were entered into for the purpose of
      hedging a portion of our variable interest expenses. Although we are required
      by
      our lenders to hedge at least 50% of the outstanding debt, we retain the
      authority to hedge a larger share of this exposure, and we will use discretion
      in managing this risk as market conditions vary over time. We only issue and/or
      hold derivative contracts for risk management purposes.





We
      do not
      have any other transactions, agreements or other contractual arrangements that
      constitute off-balance sheet arrangements.




28





**Critical
      Accounting Policies**





Our
      financial statements and accompanying notes are prepared in accordance with
      accounting principles generally accepted in the United States of America.
      Preparing financial statements requires management to make estimates and
      assumptions that affect the reported amounts of assets, liabilities, revenue,
      and expenses. These estimates and assumptions are affected by management’s
      application of accounting policies. Critical accounting policies for us include
      inventory, revenue recognition, property, plant and mine development, impairment
      of long-lived assets, accounting for equity-based compensation, environmental
      remediation costs and accounting for derivative and hedging activities.




Stockpiles,
      Ore on Leach Pads and Inventories (“In-Process Inventory”)




Costs
      that are incurred in or benefit the productive process are accumulated as
      stockpiles, ore on leach pads and inventories. Stockpiles, ore on leach pads
      and
      inventories are carried at the lower of average cost or net realizable value.
      Net realizable value represents the estimated future sales price of the product
      based on current and long-term metals prices, less the estimated costs to
      complete production and bring the product to sale. Write-downs of stockpiles,
      ore on leach pads and inventories, resulting from net realizable value
      impairments, are reported as a component of *Costs
      applicable to sales* .
      The
      current portion of stockpiles, ore on leach pads and inventories is determined
      based on the expected amounts to be processed within the next 12 months.
      Stockpiles, ore on leach pads and inventories not expected to be processed
      within the next 12 months are classified as long-term. The major
      classifications are as follows:




*Stockpiles*




Stockpiles
      represent ore that has been mined and is available for further processing.
      Stockpiles are measured by estimating the number of tons added and removed
      from
      the stockpile, the number of contained ounces or pounds (based on assay data)
      and the estimated metallurgical recovery rates (based on the expected processing
      method). Stockpile ore tonnages are verified by periodic surveys. Costs are
      allocated to stockpiles based on relative values of material stockpiled and
      processed using current mining costs incurred up to the point of stockpiling
      the
      ore, including applicable overhead, depreciation, depletion and amortization
      relating to mining operations, and removed at each stockpile’s average cost per
      recoverable unit.




*Ore
      on Leach Pads*




The
      recovery of gold from certain gold oxide ores is achieved through the heap
      leaching process. Under this method, oxide ore is placed on leach pads where
      it
      is treated with a chemical solution, which dissolves the gold contained in
      the
      ore. The resulting “pregnant” solution is further processed in a plant where the
      gold is recovered. Costs are added to ore on leach pads based on current mining
      costs, including applicable depreciation, depletion and amortization relating
      to
      mining operations. Costs are removed from ore on leach pads as ounces are
      recovered based on the average cost per estimated recoverable ounce of gold
      on
      the leach pad.




The
      estimates of recoverable gold on the leach pads are calculated from the
      quantities of ore placed on the leach pads (measured tons added to the leach
      pads), the grade of ore placed on the leach pads (based on assay data) and
      a
      recovery percentage (based on ore type). In general, leach pads recover
      approximately 50% to 95% of the recoverable ounces in the first year of
      leaching, declining each year thereafter until the leaching process is complete.




29




Although
      the quantities of recoverable gold placed on the leach pads are reconciled
      by
      comparing the grades of ore placed on pads to the quantities of gold actually
      recovered (metallurgical balancing), the nature of the leaching process
      inherently limits the ability to precisely monitor inventory levels. As a
      result, the metallurgical balancing process needs to be constantly monitored
      and
      estimates need to be refined based on actual results over time. Our operating
      results may be impacted by variations between the estimated and actual
      recoverable quantities of gold on its leach pads. Variations between actual
      and
      estimated quantities resulting from changes in assumptions and estimates that
      do
      not result in write-downs to net realizable value will be accounted for on
      a
      prospective basis.




*In-process
      Inventory*




In-process
      inventories represent materials that are currently in the process of being
      converted to a saleable product. Conversion processes vary depending on the
      nature of the ore and the specific processing facility, but include mill
      in-circuit, leach in-circuit, flotation and column cells, and carbon in-pulp
      inventories. In-process material are measured based on assays of the material
      fed into the process and the projected recoveries of the respective plants.
      In-process inventories are valued at the average cost of the material fed into
      the process attributable to the source material coming from the mines,
      stockpiles and/or leach pads plus the in-process conversion costs, including
      applicable depreciation relating to the process facilities incurred to that
      point in the process.




*Precious
      Metals Inventory*




Precious
      metals inventories include gold doré and/or gold bullion. Precious metals that
      result from our mining and processing activities are valued at the average
      cost
      of the respective in-process inventories incurred prior to the refining process,
      plus applicable refining costs.




*Concentrate
      Inventory*




Concentrate
      inventories represent gold concentrate available for shipment. We value
      concentrate inventory at the average cost, including an allocable portion of
      refinery support costs and refining depreciation. Costs are added and removed
      to
      the concentrate inventory based on tons of concentrate and are valued at the
      lower of average cost or net realizable value.




*Materials
      and Supplies*




Materials
      and supplies are valued at the lower of average cost or net realizable value.
      Cost includes applicable taxes and freight.




Property,
      Plant and Mine Development




Expenditures
      for new facilities or equipment and expenditures that extend the useful lives
      of
      existing facilities or equipment are capitalized and depreciated using the
      straight-line method at rates sufficient to depreciate such costs over the
      estimated productive lives, which do not exceed the related estimated mine
      lives, of such facilities based on proven and probable reserves.




Mineral
      exploration costs are expensed as incurred. When it has been determined that
      a
      mineral property can be economically developed as a result of establishing
      proven and probable reserves, costs incurred prospectively to develop the
      property will be capitalized as incurred and are amortized using the
      units-of-production (“UOP”) method over the estimated life of the ore body based
      on estimated recoverable ounces or pounds in proven and probable reserves.




30




Impairment
      of Long-Lived Assets




We
      review
      and evaluate our long-lived assets for impairment when events or changes in
      circumstances indicate that the related carrying amounts may not be recoverable.
      An impairment is considered to exist if the total estimated future cash flows
      on
      an undiscounted basis are less than the carrying amount of the assets, including
      goodwill, if any. An impairment loss is measured and recorded based on
      discounted estimated future cash flows. Future cash flows are estimated based
      on
      quantities of recoverable minerals, expected gold and other commodity prices
      (considering current and historical prices, price trends and related factors),
      production levels and operating costs of production and capital, all based
      on
      life-of-mine plans. Existing proven and probable reserves and value beyond
      proven and probable reserves, including mineralization other than proven and
      probable reserves and other material that is not part of the measured, indicated
      or inferred resource base, are included when determining the fair value of
      mine
      site reporting units at acquisition and, subsequently, in determining whether
      the assets are impaired. The term “recoverable minerals” refers to the estimated
      amount of gold or other commodities that will be obtained after taking into
      account losses during ore processing and treatment. Estimates of recoverable
      minerals from such exploration stage mineral interests are risk adjusted based
      on management’s relative confidence in such materials. In estimating future cash
      flows, assets are grouped at the lowest level for which there are identifiable
      cash flows that are largely independent of future cash flows from other asset
      groups. Our estimates of future cash flows are based on numerous assumptions
      and
      it is possible that actual future cash flows will be significantly different
      than the estimates, as actual future quantities of recoverable minerals, gold
      and other commodity prices, production levels and operating costs of production
      and capital are each subject to significant risks and uncertainties.




Reclamation
      and Remediation Costs (Asset Retirement Obligations)




Reclamation
      costs are allocated to expense over the life of the related assets and are
      periodically adjusted to reflect changes in the estimated present value
      resulting from the passage of time and revisions to the estimates of either
      the
      timing or amount of the reclamation and abandonment costs. The asset retirement
      obligation is based on when the spending for an existing environmental
      disturbance and activity to date will occur. We review, on an annual basis,
      unless otherwise deemed necessary, the asset retirement obligation at our mine
      site **** in
      accordance with FASB FAS No. 143, “Accounting for Asset Retirement
      Obligations.”





Deferred
      Financing Costs





Deferred
      financing costs which were included in other assets and a component of
      stockholders’ equity relate to costs incurred in connection with bank borrowings
      and are amortized over the term of the related borrowings.





Intangible
      Assets





Purchased
      intangible assets consisting of rights of way, easements and net profit
      interests are carried at cost less accumulated amortization. Amortization is
      computed using the straight-line method over the economic lives of the
      respective assets, generally five years or using the units of production method.
      It is our policy to assess periodically the carrying amount of our purchased
      intangible assets to determine if there has been an impairment to their carrying
      value. Impairments of other intangible assets are determined in accordance
      with
      SFAS 144. There was no impairment at July 31, 2007.




31





Fair
      Value of Financial Instruments





The
      carrying value of our financial instruments, including cash and cash
      equivalents, loans receivable and accounts payable approximated fair value
      because of the short maturity of these instruments.





Revenue
      Recognition





Revenue
      is recognized, net of treatment and refining charges, from a sale when the
      price
      is determinable, the product has been delivered, the title has been transferred
      to the customer and collection of the sales price is reasonably assured.





Equity
      Based Compensation





In
      connection with offers of employment to our executives as well as in
      consideration for agreements with certain consultants, we issue options and
      warrants to acquire our common stock. Employee and non-employee awards are
      made
      in the discretion of the Board of Directors.





Effective
      February 1, 2006, we adopted the provisions of SFAS No. 123R. Under FAS 123R,
      share-based compensation cost is measured at the grant date, based on the
      estimated fair value of the award, and is recognized as expense over the
      requisite service period. We adopted the provisions of FAS 123R using a modified
      prospective application. Under this method, compensation cost is recognized
      for
      all share-based payments granted, modified or settled after the date of
      adoption, as well as for any unvested awards that were granted prior to the
      date
      of adoption. Prior periods are not revised for comparative purposes. Because
      we
      previously adopted only the pro forma disclosure provisions of SFAS 123, we
      will
      recognize compensation cost relating to the unvested portion of awards granted
      prior to the date of adoption, using the same estimate of the grant-date fair
      value and the same attribution method used to determine the pro forma
      disclosures under SFAS 123, except that forfeitures rates will be estimated
      for
      all options, as required by FAS 123R.





Accounting
      for Derivatives and Hedging Activities





We
      entered into two identically structured derivative contracts with Standard
      Bank
      in March 2006. Each derivative consisted of a series of forward sales of gold
      and a purchase gold cap. We agreed to sell a total volume of 121,927 ounces
      of
      gold forward to Standard Bank at a price of $500 per ounce on a quarterly basis
      during the period from March 2007 to September 2010. We also agreed to a
      purchase gold cap on a quarterly basis during this same period and at identical
      volumes covering a total volume of 121,927 ounces of gold at a price of $535
      per
      ounce. Although these contracts are not designated as hedging derivatives,
      they
      serve an economic purpose of protecting us from the effects of a decline in
      gold
      prices. Because they are not designated as hedges, however, special hedge
      accounting does not apply. Derivative results are simply marked to market
      through earnings, with these effects recorded in *other
      income* or *other
      expense* ,
      as
      appropriate under FASB Statement No. 133, “Accounting for Derivative Instruments
      and Hedging Activities” (“FAS 133”). ****





On
      October 11, 2006, prior to our initial draw on the Credit Facility, we entered
      into interest rate swap agreements in accordance with the terms of the Credit
      Facility, which requires that we hedge at least 50 percent of our outstanding
      debt under this facility. The agreements entered into cover $9,375,000 or 75%
      of
      the outstanding debt. Both swaps covered this same notional amount of
      $9,375,000, but over different time horizons. The first covered the six months
      that commenced on October 11, 2006 and terminated on March 31, 2007 and the
      second covers the period from March 30, 2007 through December 31, 2010. We
      intend to use discretion in managing this risk as market conditions vary over
      time, allowing for the possibility of adjusting the degree of hedge coverage
      as
      we deem appropriate. However, any use of interest rate derivatives will be
      restricted to use for risk management purposes.




32





We
      use
      variable-rate debt to finance a portion of the El Chanate Project. Variable-rate
      debt obligations expose us to variability in interest payments due to changes
      in
      interest rates. As a result of these arrangements, we will continuously monitor
      changes in interest rate exposures and evaluate hedging opportunities. Our
      risk
      management policy permits us to use any combination of interest rate swaps,
      futures, options, caps and similar instruments, for the purpose of fixing
      interest rates on all or a portion of variable rate debt, establishing caps
      or
      maximum effective interest rates, or otherwise constraining interest expenses
      to
      minimize the variability of these effects.





The
      interest rate swap agreements will be accounted for as cash flow hedges, whereby
      “effective” hedge gains or losses are initially recorded in other comprehensive
      income and later reclassified to the interest expense component of earnings
      coincidently with the earnings impact of the interest expenses being hedged.
      “Ineffective” hedge results are immediately recorded in earnings also under
      interest expense. No component of hedge results will be excluded from the
      assessment of hedge effectiveness.





We
      are
      exposed to credit losses in the event of non-performance by counterparties
      to
      these interest rate swap agreements, but we do not expect any of the
      counterparties to fail to meet their obligations. To manage credit risks, we
      select counterparties based on credit ratings, limit our exposure to a single
      counterparty under defined guidelines, and monitor the market position with
      each
      counterparty as required by SFAS 133.





**Item 7.**  **Financial
      Statements.**





For
      the
      Financial Statements required by Item 7 see the Financial Statements included
      at
      the end of this Form 10-KSB.





**Item
      8.**   **Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosures.**





There
      have been no changes in or disagreements with accountants with respect to
      accounting and/or financial disclosure.





**Item
      8A.**  **Controls
      and Procedures** **.**





The
      term
      "disclosure controls and procedures" is defined in Rules 13a-15(e) and 15d-15(e)
      of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). This
      term refers to the controls and procedures of a company that are designed to
      ensure that information required to be disclosed by a company in the reports
      that it files under the Exchange Act is recorded, processed, summarized, and
      reported within the required time periods. Our Chief Executive Officer and
      our
      Chief Financial Officer have evaluated the effectiveness of our disclosure
      controls and procedures as of the end of the period covered by this quarterly
      report. They have concluded that, as of that date, our disclosure controls
      and
      procedures were effective at ensuring that required information will be
      disclosed on a timely basis in our reports filed under the Exchange
      Act.




33





No
      change
      in our internal control over financial reporting occurred during the period
      covered by this report that has materially affected, or is reasonably likely
      to
      materially affect, our internal control over financial reporting. ****





**Item
      8B.**  **Other
      Information** **.**





None.




**PART
      III**





**Item
      9.**  **Directors,
      Executive Officers, Promoters and Control Persons; Compliance with Section
      16(a)
      of the Exchange Act.**





The
      following table sets forth certain information concerning our directors and
      executive officers:


FirstBecameName
              
              Age
              
              Director
              
              PositionGifford
                  A. Dieterle
              
              75
              
              9/82
              
              President,
                  Treasurer&
                  Chairman of the BoardJohn
                  Brownlie
              
              58
              
              2/07
              
              Chief
                  Operating Officer, DirectorChristopher
                  Chipman
              
              34
              
              
              
              Chief
                  Financial OfficerJeffrey
                  W. Pritchard
              
              49
              
              1/00
              
              Director,
                  Vice President -Investor
                  Relations, SecretaryRobert
                  Roningen
              
              72
              
              9/93
              
              Director,
                  Senior Vice President,Roger
                  A. Newell
              
              64
              
              8/00
              
              DirectorJ.
                  Scott Hazlitt
              
              55
              
              
              
              Vice
                  President - Mine DevelopmentIan
                  A. Shaw
              
              67
              
              3/06
              
              DirectorJohn
                  Postle
              
              66
              
              3/06
              
              DirectorMark
                  T. Nesbitt
              
              62
              
              3/06
              
              Director




Directors
      are elected at the meeting of shareholders called for that purpose and hold
      office until the next stockholders meeting called for that purpose or until
      their resignation or death. Officers of the corporation are elected by the
      directors at meetings called by the directors for its purpose.





34





GIFFORD
      A. DIETERLE, President, Treasurer and Chairman of our Board of Directors. Mr.
      Dieterle was appointed President in September 1997 and has been an officer
      and
      Chairman since 1981. He has a M.S. in Geology obtained from New York University.
      From 1977 until July 1993, he was Chairman, Treasurer, and Executive
      Vice-President of Franklin Consolidated Mining Company. From 1965 to 1987,
      he
      was lecturer in geology at the City University of N.Y. (Hunter Division). Mr.
      Dieterle has been Secretary-Treasurer of South American Minerals Inc. since
      1997
      and a director of that company since 1996.





JOHN
      BROWNLIE, **** Chief
      Operating Officer and a Director, has worked for us since May 2006 and is in
      charge of supervising the construction, start-up and operation of the mine.
      Mr.
      Brownlie provided team management for mining projects requiring technical,
      administrative, political and cultural experience over his 28 year mining
      career. From 2000 to 2006, Mr. Brownlie was a consultant providing mining and
      mineral related services to various companies including SRK, Oxus Mining plc
      and
      Cemco Inc. From 1995 to 2000, he was the General Manager for the
      Zarafshan-Newmont Joint Venture in Uzbekistan, a one-million tonne per month
      heap leach plant which produced over 400,000 ounces of gold per year. From
      1988
      to 1995, Mr. Brownlie served as the Chief Engineer and General Manager for
      Monarch Resources in Venezuela, at both the El Callao Revemin Mill and La
      Camorra gold projects. Before that, was a resident of South Africa and
      associated with numerous mineral projects across Africa. He is also a mechanical
      engineer and fluent in Spanish.





CHRISTOPHER
      M. CHIPMAN, Chief Financial Officer. Mr. Chipman has been our Chief Financial
      Officer since March 1, 2006. Since November 2000, Mr. Chipman has been a
      managing member of Chipman & Chipman, LLC, a consulting firm that assists
      public companies with the preparation of periodic reports required to be filed
      with the Securities and Exchange Commission and compliance with Section 404
      of
      the Sarbanes Oxley Act of 2002. The firm also provides outsourced financial
      resources to clients assisting in financial reporting, forecasting and
      accounting services. Mr. Chipman is a CPA and, from 1996 to 1998, he was a
      senior accountant with the accounting firm of Grant Thornton LLP. Mr. Chipman
      was the Controller of Frontline Solutions, Inc., a software company (March
      2000
      to November 2000); a Senior Financial Analyst for GlaxoSmithKline (1998-2000);
      and an Audit Examiner for Wachovia Corporation (1994-1996). He received a B.A.
      in Economics from Ursinus College in 1994. He is a member of the American and
      Pennsylvania Institute of Certified Public Accountants. Mr. Chipman devotes
      approximately 50% of his time to our business.





JEFFREY
      W. PRITCHARD, Vice President - Investor Relations, Secretary and Director,
      has
      worked for us since 1996. He has been in the marketing/public relations field
      since receiving a Bachelor’s degree from the State University of New York in
      1979. Mr. Pritchard has served as the Director of Marketing for the New Jersey
      Devils (1987-1990) and as the Director of Sales for the New York Islanders
      (1985-1987). He also was an Executive Vice President with Long Island based
      Performance Network, a marketing and publishing concern from 1990 through
      1995.





ROBERT
      RONINGEN, Senior Vice President and Director, has been engaged in the practice
      of law as a sole practitioner and is a self-employed consultant geophysicist
      in
      Duluth, Minnesota. Mr. Roningen served as our Secretary until February 2007.
      From 1988 to August 1993, he was an officer and director of Franklin
      Consolidated Mining Company, Inc. He graduated from the University of Minnesota
      in 1957 with a B.A. in geology and in 1962 with a degree in Law.





ROGER
      A.
      NEWELL, Director, worked for us from 2000 to September 2007. He was our Vice
      President - Development until September 2007. Since October 2007, Mr. Newell
      has
      been an Executive Vice President of Kilimanjaro Mining Company Ltd., a private
      Nevada based company involved in uranium and gold exploration in Tanzania,
      Africa. From 1974 through 1977, he was a geologist with Kennecott Copper
      Corporation. From 1977 through 1989, he served as Exploration Manager/Senior
      Geologist for the Newmont Mining Corporation and, from 1989 through 1995, was
      the Exploration Manager for Gold Fields Mining Company. He was Vice President
      Development, for Western Exploration Company from 1997 through 2000. Since
      1995,
      he has been a senior consultant in the Minerals Advisory Group LLC, Tucson,
      Arizona, a company that provides technical and engineering advice to clients
      regarding mineral projects. He has been self-employed as a geologist since
      2001.
      He is a Fellow in the Society of Economic Geologists and a Past President of
      that Society’s Foundation. . He has a M.Sc. from the Colorado School of Mines
      and a Ph.D. in mining and mineral exploration from Stanford
      University.




35





J.
      SCOTT
      HAZLITT, Vice President - Mine Development, has been in the mining business
      since 1974. Since 2001, he has focused on development of our El Chanate
      concessions. Currently, he is involved in mine expansion plans and corporate
      development.  He has worked primarily in reserves, feasibility, development
      and mine operations. Mr. Hazlitt was a field geologist for ARCO Syncrude
      Division at their CB oil Shale project in 1974 and 1975. He was a contract
      geologist for Pioneer Uravan and others from 1975 to 1977. He was a mine
      geologist for Cotter Corporation in 1978 and 1979, and was a mine geologist
      for
      ASARCO from 1979 to 1984. He served as Vice President of Exploration for Mallon
      Minerals from 1984 to 1988. From 1988 to 1992, Mr. Hazlitt was a project
      geologist and Mine Superintendent for the Lincoln development project. From
      1992
      to 1995, he was self-employed as a consulting mining geologist in California
      and
      Nevada. He was Mine Operations Chief Geologist for Getchell Gold from 1995
      to
      1999. His work experience has included precious metals, base metals, uranium,
      and oil shale. Mr. Hazlitt served as mine manager at our Hopemore Mine in
      Leadville, Colorado starting in November 1999. His highest educational degree
      is
      Master of Science from Colorado State University. He is a registered geologist
      in the state of California.





IAN
      A.
      SHAW is a member of our Board of Directors and the Board’s Audit and
      Compensation Committees.  Mr. Shaw has over 32 years of experience in the
      mining industry. He has been Managing Director of Shaw & Associates since
      1993.  Shaw & Associates is a corporate services consulting firm
      specializing in corporate finance, regulatory reporting and compliance with
      clients that are typically public companies in the resource industry. In the
      course of providing consulting services he has accepted positions as an officer
      or director with number of his clients. Positions he currently holds include
      Director, since 1994, of Metallica Resources Inc., a TSX listed corporation
      with
      a gold mine in Mexico, and exploration properties in Chile and Alaska; Chief
      Financial Officer, since 1995, of  Pelangio Mines Inc., a TSX listed
      corporation with an interest in a gold property in Canada and gold exploration
      properties in Ghana; Vice President, Finance and CFO, since May 2005, of Unor
      Inc., a TSX listed company with uranium exploration properties in Canada;
      and Chief Financial Officer, since January 2007, of Olivut Resources Ltd.,
      a TSX
      listed corporation with diamond exploration properties in Canada. Mr. Shaw
      is a
      Chartered Accountant and received a B. Comm. from Trinity College at the
      University of Toronto in 1964.





JOHN
      POSTLE is a member of our Board of Directors and the Board’s Audit and
      Compensation Committees.  He is a Consulting Mining Engineer associated
      with Scott Wilson Roscoe Postle Associates Inc. In 1985 he was a founding
      partner of Roscoe Postle Associates Inc. which later merged with Scott Wilson
      Group Plc.  Mr. Postle provides mining consulting services to a number of
      international financial institutions, corporations, utilities and law
      firms.  He worked for Cominco Ltd (1965-1970), Falconbridge Ltd (1970-1975)
      and D.S. Robertson and Associates (1976-1985) and has worked at a number of
      open
      pit and underground mining operations in both operating and planning
      capacities.  Mr. Postle is a Past Chairman of the Mineral Economics
      Committee of the Canadian Institute of Mining, Metallurgy and Petroleum (“CIM”),
      and was appointed a Distinguished Lecturer of the CIM in 1991.  In 1997, he
      was awarded the CIM Robert Elver Mineral Economics Award.  He is currently
      Chairman of a CIM Standing Committee on Ore Reserve Definitions. Mr. Postle
      is a
      director of Strait Gold Corporation, a Canadian publicly traded company, and
      serves as a member of that company’s audit and disclosure committees.  Mr.
      Postle has a B.A.Sc. Degree in Mining Engineering from the University of British
      Columbia in 1965 and a M.Sc. Degree in Earth Sciences from Stanford University
      in 1968. ”




36




MARK
      T.
      NESBITT is a member of our Board of Directors and the Board’s Audit and
      Compensation Committees. Since 1988, he has been a natural resources attorney
      in
      Denver, Colorado specializing in domestic and international mining transactions,
      agreements, negotiations, title due diligence, corporate and general business
      counsel. Mr. Nesbitt has been an Adjunct Professor at the University of Denver
      School of Law's since 2001, is an active member of the Rocky Mountain Mineral
      Law Foundation, having served as a Trustee from 1987 to 1993, and from 2003
      to
      2006, Co-chairman of the Mining Sessions at the Foundation’s international
      natural resource institute in Buenos Aires, Argentina in 2007, Co-chairman
      of
      the Foundation's Mining Law and Investment in Latin America institute in Lima,
      Peru in 2003, and Chairman of the same institute in 2003, and Chairman of the
      Foundation's first Land and Permitting Special Institute in 1994. He also has
      served continuously over the years on the Foundation's Special Institutes
      Committee, Long Range Planning Committee, and numerous other committees. Mr.
      Nesbitt is a member of the International, American, Colorado and Denver Bar
      Associations, Rocky Mountain Mineral Law Foundation, International Mining
      Professionals Society (Treasurer since 2000), and the Colorado Mining
      Association. He is also a former Director of the Colorado Mining Association
      and
      past President of the Rocky Mountain Association of Mineral Landmen. He received
      a B.S. degree in Geology from Washington State University in 1968 and a J.D.
      from Gonzaga University School of Law in 1975.





Jack
      V.
      Everett, resigned as our Vice President of Exploration and a member of our
      Board
      of Directors on June 6, 2007. On September 10, 2007, Roger A. Newell resigned
      as
      our Vice President of Development. He continues to serve as a member of our
      Board of Directors.





Compliance
      with Section 16(a) of The Securities Exchange Act of 1934





To
      our
      knowledge, during the fiscal year ended July 31, 2007, based solely on a review
      of such materials as are required by the Securities and Exchange Commission,
      no
      officer, director or beneficial holder of more than ten percent of our issued
      and outstanding shares of Common Stock failed to timely file with the Securities
      and Exchange Commission any form or report required to be so filed pursuant
      to
      Section 16(a) of the Securities Exchange Act of 1934, except that, Robert
      Roningen, filed Forms 4 late for an aggregate of 24 transactions, Jack Everett,
      a former Vice President, filed a Form 4 late for an aggregate of four
      transactions, Jeffrey Pritchard filed a Form 4 late for one transaction and
      Scott Hazlitt filed a Form 4 late for one transaction.





Meetings
      And Committees Of The Board





Our
      Board
      of Directors is responsible for the management and direction of our company
      and
      for establishing broad corporate policies. A
      primary responsibility of the Board is to provide effective governance over our
      affairs for the benefit of our stockholders. In all actions taken by the Board,
      the Directors are expected to exercise their business judgment in what they
      reasonably believe to be the best interests of our company. In discharging
      that
      obligation, Directors may rely on the honesty and integrity of our senior
      executives and our outside advisors and auditors.




37





The
      Board
      of Directors and the Audit Committee of the Board meet periodically throughout
      the year to receive and discuss operating and financial reports presented by
      our
      executive officers as reports by experts and other advisors. The Board held
      five
      meetings during the fiscal year ended July 31, 2007 in person and
      telephonically, and acted by unanimous written consent on seven occasions.
      All
      directors attended 75% or more of the aggregate meetings.




In
      fiscal
      2007, the Audit Committee, consisting of all of the non-employee members of
      the
      Board of Directors, met on four occasions. Representatives of our auditor were
      in attendance at one meeting without management present.





Our
      Board
      of Directors has no standing nominating committee because this function is
      handled by the Board of Directors. Nominees to the Board of Directors are
      selected by the Board of Directors based on current business and industry
      knowledge as well as general business knowledge.





**Audit
      Committee and Audit Committee Expert** .





The
      Audit
      Committee of our Board of Directors consists of Ian A. Shaw, Committee Chairman,
      John Postle and Mark T. Nesbitt. The Board of Directors has determined that
      all
      three members are independent directors as (i) defined in Rule 10A-3(b)(1)(ii) under the
      Securities Exchange Act of 1934 (the “Exchange Act”) and (ii) under Section
      121B(2)(a) of the AMEX Company Guide (although our securities are not listed
      on
      the American Stock Exchange or any other national exchange). The
      Audit
      Committee met four times telephonically in fiscal 2007. All committee members
      were present at the meetings.





Mr.
      Shaw serves
      as the financial expert as defined in Securities and Exchange Commission rules
      on the committee. We believe Messrs. Shaw, Postle and Nesbitt to be independent
      of management and free of any relationship that would interfere with their
      exercise of independent judgment as members of this committee. The principal
      functions of the Audit Committee are to (i) assist the Board in fulfilling
      its
      oversight responsibility relating to the annual independent audit of our
      consolidated financial statements, the engagement of the independent registered
      public accounting firm and the evaluation of the independent registered public
      accounting firm’s qualifications, independence and performance (ii) prepare the
      reports or statements as may be required by the securities laws, (iii) assist
      the Board in fulfilling its oversight responsibility relating to the integrity
      of our financial statements and financial reporting process and our system
      of
      internal accounting and financial controls, (iv) discuss the financial
      statements and reports with management, including any significant adjustments,
      management judgments and estimates, new accounting policies and disagreements
      with management, and (vi) review disclosures by independent accountants
      concerning relationships with us and the performance of our independent
      accountants.





**Compensation
      Committee.**





In
      May
      2007, our Board of Directors established a Compensation Committee consisting
      of
      Messrs. Shaw, Postle and Nesbitt, our independent directors. The principal
      functions of the Compensation Committee are to advise and makes recommendations
      to our Board of Directors regarding matters relating to the compensation of
      directors, officers and senior management. The Compensation Committee met once
      telephonically in fiscal 2007. All committee members were present at the
      meetings.





38




**Communication
      with the Board of Directors**





Interested
      parties wishing to contact the Board of Directors of the Company may do so
      by
      writing to the following address: Board of Directors, 76
      Beaver
      Street, 14th Floor, New York, NY 10005, Attn: Jeffrey W. Pritchard,
      Secretary .
      All
      letters received will be categorized and processed by Mr. Pritchard and then
      forwarded to the Company’s Board or Directors.





**Changes
      to Director nominee procedures**





As
      noted
      in last year’s report, in August 2006, we amended our bylaws to require
      stockholders that seek to bring business before a meeting of stockholders,
      including nominations of candidates for election as directors, to provide notice
      of such business to us not less than 90 days nor more than 120 days prior to
      the
      date of the meeting (provided that, in the event that public disclosure of
      the
      meeting date is first made less than 120 days prior to the meeting date, such
      notice must be received by us not later than the close of business on the tenth
      day following such public disclosure). With regard to nominations of persons
      for
      election to the Board of Directors, the notice must set forth (a) as to each
      proposed nominee, (i) the name, age, business address and residence address
      of
      the nominee, (ii) the principal occupation or employment of the nominee, (iii)
      the number of our shares owned beneficially or of record by the nominee and
      (iv)
      any other information relating to the nominee that would be required to be
      disclosed in a proxy statement to be made in connection with solicitations
      of
      proxies for election of directors pursuant to Section 14 of the Securities
      Exchange Act of 1934, as amended (the "Exchange Act"); and (b) as to the
      Stockholder giving the notice, (i) the name and record address of such
      Stockholder, (ii) the number of our shares owned beneficially or of record
      by
      such Stockholder, (iii) a description of all arrangements or understandings
      between such Stockholder and each proposed nominee and any other person or
      persons (including their names) pursuant to which the nomination(s) are to
      be
      made by such Stockholder, (iv) a representation that such Stockholder intends
      to
      appear in person or by proxy at the meeting to nominate the persons named in
      its
      notice and (v) any other information relating to such Stockholder that would
      be
      required to be disclosed in a proxy statement to be made in connection with
      solicitations of proxies for election of directors pursuant to Section 14 of
      the
      Exchange Act. Such notice must be accompanied by a written consent of each
      proposed nominee to being named as a nominee and to serve as a director
      if


elected.





**Code
      of Ethics**





We
      adopted a Code of Ethics that applies to our officers, directors and employees,
      including our principal executive officer, principal financial officer and
      principal accounting officer. The
      Code
      of Ethics is publicly available in the Management section on our Website at
      www.capitalgoldcorp.com. If we make any substantive amendments to this code
      of
      ethics or grant any waiver, including any implicit waiver, from a provision
      of
      the code to our chief executive officer, principal financial officer or
      principal accounting officer, we will disclose the nature of such amendment
      or
      waiver on that Website or in a report on Form 8-K.





39




**Item
      10.**  **Executive
      Compensation**




**Summary
      Compensation Table**




The
      following table sets forth the total compensation paid to or earned by our
      named
      executive officers, as that term is defined in Item 402(a)(2) of Regulation
      S-B
      as of our fiscal year ended July 31, 2007:




**Name
                &**
              **Principal**
              **Position**
            
            **Year**
            
            **Salary**
              **($)**
            
            **Bonus**
              **($)**
            
            **Stock**
              **Awards**
              (2)
            
            **Option**
              **Awards**
              (1)
            
            **Non-Equity**
              **Incentive**
              **Plan**
              **Compen-**
              **sation**
            
            **Non-**
              **qualified**
              **Deferred**
              **Compen-**
              **sation**
              **Earnings**
            
            **All
                Other**
              **Compen-**
              **sation**
              **($)**
            
            **Total**
              **($)**Gifford
                A. Dieterle,
              Director,
                Chairman, Treasurer and CEO
            
            
            2007
            
            $
            180,000
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            180,000John
                Brownlie,
              Director
                and COO
            
            
            2007
            
            $
            150,000
            
            $
            -
            
            $
            225,000
            
            $
            34,000
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            409,000Christopher
                M. Chipman,
              CFO
            
            
            2007
            
            $
            118,000
            
            $
            -
            
            $
            -
            
            $
            79,000
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            197,000




**Notes:**




(1)
            Based
                on Black Scholes Pricing Model of valuing options. Total fair value
                of
                option awards granted in 2007 was $113,000.(2)
            Issuance
                of shares based on the fair market value of the Company’s common stock on
                the date of grant.




**Outstanding
      Equity Awards At Fiscal Year-End**




The
      following table provides information concerning unexercised options for each
      of
      our named executive officers, as that term is defined in Item 402(a)(2) of
      Regulation S-B as of our fiscal year ended July 31, 2007:




**Name
                and Principal**
              **Position**
            
            **Number
                of**
              **Securities**
              **Underlying**
              **Unexercised**
              **Options
                (#)**
              **Exercisable**
            
            **Number
                of**
              **Securities**
              **Underlying**
              **Unexercised**
              **Options
                (#)**
              **Unexercisable**
            
            **Equity
                Incentive**
              **Plan
                Awards:**
              **Number
                of**
              **Securities**
              **Underlying**
              **Unexercised**
              **Unearned
                Options**
            
            **Option**
              **Exercise**
              **Price**
            
            **Option**
              **Expiration**
              **Date**Gifford
                A. Dieterle,Director,
                Chairman, Treasurer and CEO
            
            
            250,000
            
            
            -
            
            
            -
            
            $
            0.32
            
            
            7/31/08John
                Brownlie, Director and COO
            
            
            250,000
            
            
            -
            
            
            -
            
            $
            0.36
            
            
            12/13/08200,000
            
            
            150,000
            
            
            150,000
            
            $
            0.32
            
            
            5/12/08Christopher
                M. Chipman, CFO
            
            
            50,000
            
            
            -
            
            
            -
            
            $
            0.34
            
            
            3/1/08100,000
            
            
            -
            
            
            -
            
            $
            0.36
            
            
            12/13/08500,000
            
            
            -
            
            
            -
            
            $
            0.38
            
            
            6/13/09




40




**Director
      Compensation**




The
      following table sets forth the compensation paid to our directors for the fiscal
      year ended July 31, 2007.




**Name**
            
            **Fees**
              **Earned
                or**
              **Paid
                in**
              **Cash**
              **($)**
            
            **Stock**
              **Awards**
              **($)**
            
            **Option**
              **Awards**
              **($)**(1)
            
            **Non-Equity**
              **Incentive
                Plan**
              **Compensation**
              **($)**
            
            **Nonqualified**
              **Deferred**
              **Compensation**
              **Earnings**
              **($)**
            
            **All
                Other**
              **Compensation**
              **($)**
            
            **Total**
              **($)**Ian
                A. Shaw, Director
            
            $
            12,000
            
            
            -
            
            $
            13,239
            
            
            -
            
            
            -
            
            
            -
            
            $
            25,239John
                Postle, Director
            
            $
            12,000
            
            
            -
            
            $
            13,239
            
            
            -
            
            
            -
            
            
            -
            
            $
            25,239Mark
                T. Nesbitt, Director
            
            $
            12,000
            
            
            -
            
            $
            13,239
            
            
            -
            
            
            -
            
            
            -
            
            $
            25,239Robert
                Roningen, Director
            
            $
            24,000
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            $
            24,000





**Notes:**(1)
                Based on Black Scholes Pricing Model of valuing options. Total fair
                value
                of option awards granted in 2007 was
                $39,717.





During
      the fiscal year ended July 31, 2007, our Independent Directors each received
      a
      fee of $1,000 per month. Robert Roningen, director, received a fee of $2,000
      per
      month for legal and consulting services during the fiscal year ended July 31,
      2007. Directors are not otherwise compensated for acting in their capacity
      as
      Directors. Directors are reimbursed for their accountable expenses incurred
      in
      attending meetings and conducting their duties. On August 29, 2007, we increased
      directors’ compensation to our independent directors and to Robert Roningen by
      $1,000 per month.





Employment
      and Change of Control Agreements





Effective
      July 31, 2006, we entered into employment agreements with the following
      executive officers: Gifford A. Dieterle, our President and Treasurer, Roger
      A.
      Newell, our then Vice President of Development, Jack V. Everett, our then Vice
      President of Exploration, and Jeffrey W. Pritchard, our Vice President of
      Investor Relations. Agreements with John Brownlie, our Chief Operating Officer,
      and Christopher Chipman, our Chief Financial Officer, are discussed
      below.





The
      agreements run for a period of three years and automatically renew for
      successive one-year periods unless we or the executive provides the other party
      with written notice of our or his intent not to renew at least 30 days prior
      to
      the expiration of the then current employment period.




41





Under
      the
      original agreements, Mr. Dieterle is entitled to a base annual salary of at
      least $180,000 and each of the other executives is entitled to a base annual
      salary of at least $120,000. Each executive is entitled to a bonus or salary
      increase in the sole discretion of our board of directors. In addition, each
      of
      the executives received two year options to purchase an aggregate of 250,000
      shares of our common stock at an exercise price of $0.32 per share (the closing
      price on July 31, 2006).





On
      August
      29, 2007, based on the recommendation of the Compensation Committee of our
      Board
      of Directors after review of an Executive Compensation Market Analysis and
      Report by an independent  human
      resource professional services firm, we increased the salaries of our executive
      officers to be commensurate with industry standards. The new salaries are as
      follows: Gifford A. Dieterle,  President,
      Treasurer and Chairman of the Board, $250,000; John Brownlie, Chief Operating
      Officer, $225,000; Christopher Chipman, Chief Financial Officer, $175,000
      (consulting fee); Jeffrey W. Pritchard, Vice President - Investor Relations
      and
      Secretary, $195,000; and J. Scott Hazlitt, Vice President - Mine Development,
      $135,000. The salary increase for Mr. Brownlie and the consulting fee increase
      for Mr. Chipman were retroactive to May 1, 2007 and the salary increase for
      Mr.
      Pritchard was retroactive to August 1, 2007.





We
      have
      the right to terminate any executive’s employment for cause or on 30 days’ prior
      written notice without cause or in the event of the executive’s disability (as
      defined in the agreements). The agreements automatically terminate upon an
      executive’s death. “Cause” is defined in the agreements as (1) a failure or
      refusal to perform the services required under the agreement; (2) a material
      breach by executive of any of the terms of the agreement; or (3) executive’s
      conviction of a crime that either results in imprisonment or involves
      embezzlement, dishonesty, or activities injurious to us or our reputation.
      In
      the event that we terminate an executive’s employment without cause or due to
      the disability of the executive, the executive will be entitled to a lump sum
      severance payment equal to one month’s salary, in the case of termination for
      disability, and up to 12 month’s salary (depending upon years of service), in
      the case of termination without cause.





Each
      executive has the right to terminate his employment agreement on 60 days’ prior
      written notice or, in the event of a material breach by us of any of the terms
      of the agreement, upon 30 days’ prior written notice. In the event of a claim of
      material breach by us of the agreement, the executive must specify the breach
      and our failure to either (i) cure or diligently commence to cure the breach
      within the 30 day notice period, or (ii) dispute in good faith the existence
      of
      the material breach. In the event that an agreement terminates due to our
      breach, the executive is entitled to severance payments in equal monthly
      installments beginning
      in the month following the executive’s termination equal to three month’ salary
      plus one additional month’s salary for each year of service to us. Severance
      payments cannot exceed 12
      month’s salary.





In
      conjunction with the employment agreements, our board of directors deeming
      it
      essential to the best interests of our stockholders to foster the continuous
      engagement of key management personnel and recognizing that, as is the case
      with
      many publicly held corporations, a change of control might occur and that such
      possibility, and the uncertainty and questions which it might raise among
      management, might result in the departure or distraction of management personnel
      to the detriment of our company and our stockholders, determined to reinforce
      and encourage the continued attention and dedication of members of our
      management to their engagement without distraction in the face of potentially
      disturbing circumstances arising from the possibility of a change in control
      of
      our company, we entered into identical agreements regarding change in control
      with the executives. Each
      of
      the agreements regarding change in control continues through December 31, 2009
      and extends automatically to the third anniversary thereof unless we give notice
      to the executive prior to the date of such extension that the agreement term
      will not be extended. Notwithstanding the foregoing, if a change in control occurs during the term
      of
      the agreements, the term of the agreements will continue through the second
      anniversary of the date on which the change in control occurred. Each of the
      agreements entitles the executive to change of control benefits, as defined
      in
      the agreements and summarized below, upon his termination of employment with
      us
      during a potential change in control, as defined in the agreements, or after
      a
      change in control, as defined in the agreements, when his termination is caused
      (1) by us for any reason other than permanent disability or cause, as defined
      in
      the agreement (2) by the executive for good reason as defined in the agreements
      or, (3) by the executive for any reason during the 30 day period commencing
      on
      the first date which is six months after the date of the change in control.
      Each
      executive would receive a lump sum cash payment of three times his base salary
      and outplacement benefits. Each agreement also provides that the executive
      is
      entitled to a payment to make him whole for any federal excise tax imposed
      on
      change of control or severance payments received by him.




42





In
      May
      2006, we entered into an employment agreement with John Brownlie, pursuant
      to
      which Mr. Brownlie originally served as Vice President Operations. Mr. Brownlie
      became our Chief Operating Officer in February 2007. Mr. Brownlie now receives
      a
      base annual salary of $225,000 and is entitled to annual bonuses. Upon his
      employment, he received options to purchase an aggregate of 200,000 shares
      of
      our common stock at an exercise price of $.32 per share. 50,000 options vested
      immediately and the balance vest upon our achieving “Economic Completion” as
      that term is defined in the loan agreement with Standard Bank plc (when we
      have
      commenced mining operations and have been operating at anticipated capacity
      for
      60 to 90 days). The term of the options is two years from the date of vesting.
      The agreement runs for an initial two year period and automatically renews
      thereafter for additional one year periods unless terminated by either party
      within 30 days of a renewal date. We can terminate the agreement for cause
      or
      upon 30 days notice without cause. Mr. Brownlie can terminate the agreement
      upon
      60 days notice without cause or, if there is a breach of the agreement by us
      that is not timely cured, upon 30 days notice. In the event that we terminate
      him without cause or he terminates due to our breach, he will be entitled to
      certain severance payments.





On
      September 14, 2007, we entered into a Second Amended Engagement Agreement (the
      “Engagement Agreement”) with Christopher Chipman, our Chief Financial Officer,
      effective May 1, 2007. The Engagement Agreement supersedes and replaces Mr.
      Chipman’s prior agreement that expired on August 31, 2007. Pursuant to the
      Engagement Agreement, Mr. Chipman is engaged as our Chief Financial Officer
      and
      devotes approximately 85% of his time to our business. He receives a monthly
      fee
      of $14,583. The Engagement Agreement expires on August 31, 2009 and
      automatically renews for successive one-year periods, unless either party gives
      at least 30 days prior notice to the other party of its intent not to renew.
      Mr.
      Chipman can terminate the Engagement Agreement on 60 days prior notice. We
      can
      terminate the Engagement Agreement without cause on 30 days prior notice and
      for
      cause (as defined in the Engagement Agreement). The Engagement Agreement also
      terminates upon Mr. Chipman’s disability (as defined in the Engagement
      Agreement) or death. In the event that we terminate the Engagement Agreement
      without cause, Mr. Chipman will be entitled to a cash termination payment equal
      to his Annual Fee in effect upon the date of termination, payable in equal
      monthly installments beginning in the month following his termination. In the
      event the Engagement Agreement is terminated by Mr. Chipman at his election
      or
      due to his death or disability, Mr. Chipman will be entitled to the fees
      otherwise due and payable to him through the last day of the month in which
      such
      termination occurs.





In
      conjunction with Engagement Agreement, we entered into a change of control
      agreement similar to the agreements entered into with our other executive
      officers. The change of control agreement continues through August 31, 2009
      and
      extends automatically to the next anniversary thereof unless we give notice
      to
      Mr. Chipman prior to the date of such extension that the agreement term will
      not
      be extended. Notwithstanding the foregoing, if a change in control occurs during
      the term of the change of control agreement, the term of the agreement will
      continue through the anniversary of the date on which the change in control
      occurred. The change of control agreement entitles Mr. Chipman to change of
      control benefits, as defined in the agreement and summarized below, upon his
      termination of employment with us during a potential change in control (as
      defined in the agreement) or after a change in control (as defined in the
      agreement) when his termination is caused (1) by us for any reason other than
      permanent disability or cause, as defined in the agreement (2) by Mr. Chipman
      for good reason (as defined in the agreement) or, (3) by Mr. Chipman for any
      reason during the 30 day period commencing on the first date which is six months
      after the date of the change in control. Mr. Chipman would receive a lump sum
      cash payment equal to three times his base annual fee plus three times his
      bonus
      award for the year immediately preceding the year of the change in control,
      and
      outplacement benefits. The change of control agreement also provides that Mr.
      Chipman is entitled to a payment to make him whole for any federal excise tax
      imposed on change of control or severance payments received by him.




43





In
      connection with the original engagement agreement with Mr. Chipman, in March
      2006, Mr. Chipman received a two year option to purchase an aggregate of 50,000
      shares of our common stock at an exercise price of $.34 per share. These options
      are now fully vested.





Please
      also see *“Part
      III, Item 12. Certain Relationships and Related Transactions”* below.





**Item
      11.**  **Security
      Ownership of Certain Beneficial Owners and Management and Related Stockholder
      Matters** **.**





The
      following table sets forth as of October 1 ,
      2007 ,
      the
      number and percentage of outstanding shares of Common Stock beneficially owned
      by:





·
            Each
                person, individually or as a group, known to us to be deemed the
                beneficial owners of five percent or more of our issued and outstanding
                Common Stock;


·
            each
                of our Directors and the Named Executives;
                and


·
            all
                of our officers and Directors as a group.





As
      of the
      foregoing date, there were no other persons, individually or as a group, known
      to us to be deemed the beneficial owners of five percent or more of the issued
      and outstanding Common Stock.





This
      table is based upon information supplied by Schedules 13D and 13G, if any,
      filed
      with the Securities and Exchange Commission, and information obtained from
      our
      directors and named executives. For purposes of this table, a person or group
      of
      persons is deemed to have “beneficial ownership” of any shares of Common Stock
      which such person has the right to acquire within 60 days of October
      1 ,
      2007 .
      For
      purposes of computing the percentage of outstanding shares of Common Stock
      held
      by each person or group of persons named in the table, any security which such
      person or persons has or have the right to acquire within such date is deemed
      to
      be outstanding but is not deemed to be outstanding for the purpose of computing
      the percentage ownership of any other person. Except as indicated in the
      footnotes to this table and pursuant to applicable community property laws,
      we
      believe, based on information supplied by such persons, that the persons named
      in this table have sole voting and investment power with respect to all shares
      Common Stock which they beneficially own. Unless otherwise noted, the address
      of
      each of the principal stockholders is care of us at 76 Beaver Street,
      14 th floor,
      New York, NY10005.





44


Name
                  and Address of Beneficial Owner
              
              Amount
                  & Nature of Beneficial Ownership
              
              Approximate
                  Percentage(1)Gifford
                  A. Dieterle*
              
              
              2,762,455
              (2)
              
              1.6
              %Robert
                  Roningen*
              
              
              1,718,750
              (3)
              
              1.0
              %2955
                  Strand RoadDuluth,
                  MN 55804Jeffrey
                  W. Pritchard*
              
              
              1,006,354
              (2)
              
              **Christopher
                  Chipman*
              
              
              650,000
              (2)
              
              **4014
                  Redwing LaneAudubon,
                  PA 19407Roger
                  A Newell*
              
              
              1,577,273
              (2)
              
              **1781
                  South Larkspur DriveGolden,
                  CO 80401John
                  Brownlie*6040
                  Puma RidgeLittleton,
                  CO 80124
              
              
              950,000
              (2)
              
              **Scott
                  Hazlitt*
              
              
              1,025,000
              
              
              **9428
                  W. Highway 50Salida.
                  CO 81201Ian
                  A. Shaw*
              
              
              100,000
              (2)
              
              **98
                  Crimson MillwayToronto,
                  Ontario M2L IT6CanadaJohn
                  Postle*
              
              
              100,000
              (2)
              
              **2169
                  Constance DriveOakville
                  OntarioCanada
                  L6J 5l2Mark
                  T. Nesbitt*
              
              
              141,666
              (2)(4)
              
              **1580
                  Lincoln St., Ste. 700Denver
                  CO 80203-1501Strategic
                  Precious Metal Fund
              
              
              12,500,000
              (5)
              
              7.2
              %c/o
                  Banque Cantonale VaoudoisePlace
                  St-Francois 141003
                  Lausanne, Switzerland
  45
  RAB
                  Special Situations(Master)
                  Fund Limited
              
              
              12,648,552
              (6)
              
              7.4
              %1
                  Adam StreetLondon,
                  WC2N 6LE, UKSPGP
              
              
              20,270,000
              (7)
              
              11.8
              %17,
                  Avenue Matignon75008
                  Paris, FranceStandard
                  Bank PLC
              
              
              15,750,000
              (8)
              
              8.5
              %320
                  Park AvenueNew
                  York, NY 10022Van
                  Eck International Investors
              
              
              10,000,000
              (9)
              
              5.8
              %Gold
                  Fund99
                  Park AvenueNew
                  York, NY 10016andVan
                  Eck Long/Short GoldPortfolio
                  Ltd.Ogier
                  Fiduciary ServicesPO
                  box 1234Queensgate
                  HouseSouth
                  Church StreetGeorgetownGrand
                  Cayman, Cayman IslandsAll
                  Officers andDirectors
                  as aGroup
                  (10 persons)
              
              
              10,031,498
              (2)(3)(4)
              
              5.8
              %





*  Officer
      and/or Director of Capital Gold.


**  Less
      than
      1%.





(1)
            Based
                upon 171,743,648 shares issued and outstanding as of October 12,
                2007.





(2)
            For
                Messrs. Dieterle, Pritchard, Chipman, Newell, Brownlie, Shaw, Postle
                and
                Nesbitt includes, respectively, 250,000 shares, 250,000 shares, 650,000
                shares, 250,000 share, 450,000 shares, 100,000 shares, 100,000 shares
                and
                100,000 shares issuable upon exercise of options.





(3)
            Represents
                shares owned by Mr. Roningen’s wife. All of the foregoing shares are
                pledged as collateral for payment of a bank
                note.





(4)
            Includes
                shares owned jointly with his wife.





(5)
            Includes
                2,500,000 shares issuable upon exercise of warrants issued in
                theJanuary
                2007 Private Placements. The securities are held of record by Banque
                Cantonale Vaudoise (as custodian). We have been advised that FidFund
                Management SA is the Fund Manager for Strategic Precious Metal Fund
                and
                that various persons at the Fund Manager, including its directors,
                Christian Piguet, Gino Leonardi, Ariane Ischi, Claudio Müller and Herzig
                Steve, share dispositive and voting power over the shares held by
                Strategic Precious Metal Fund.




46




(6)
            The
                shares are held of record by Credit Suisse First Boston LLC. We have
                been
                advised that William P. Richards is the Fund Manager for RAB Special
                Situations (Master) Fund Limited, with dispositive and voting power
                over
                the shares held by RAB Special Situations (Master) Fund Limited.





(7)
            We
                have been advised that Xavier Roulet, is a natural person with voting
                and
                investment control over shares of our common stock beneficially owned
                by
                SPGP.





(8)
            Includes
                shares issuable upon exercise of warrants to purchase an aggregate
                of
                13,600,000 shares. We have been advised that Standard Bank PLC’s directors
                and senior management are natural persons with voting and investment
                control over shares of our common stock beneficially owned by Standard
                Bank PLC.





(9)
            Represents
                shares owned by the listed stockholders. Separately, the stockholders
                do
                not beneficially own in excess of 5% of our outstanding shares of
                Common
                Stock. However, both stockholders have identified Joseph Foster as
                a
                natural person with voting and investment control over shares of
                our
                common stock beneficially owned by the stockholders. Mr. Foster is
                the
                portfolio manager for Van Eck Associates Corporation and Van Eck
                Absolute
                Return Advisers Corp., the investment advisors for, respectively,
                Van Eck
                International Investors Gold Fund and Van Eck Long/Short Gold Portfolio
                Ltd.




**Item
      12. Certain Relationships and Related Transactions.**





In
      January 2006, we extended the following stock options through January 3, 2007,
      all of which were exercisable at $0.05 per share: Messrs. Dieterle - 1,050,000
      shares; Roningen - 500,000 shares; Pritchard - 327,727 shares; Newell - 500,000
      shares; and Hazlitt - 25,000 shares. These options were exercised in 2007 for
      aggregate gross proceeds of $122,000.





Upon
      their engagement with us, we issued 50,000 two year options to Christopher
      Chipman, our Chief Financial Officer, (March 2006) and 200,000 two year options
      to John Brownlie, our Chief Operating Officer, (May 2006). Mr. Chipman’s options
      are exercisable at $.34
      per
      share and are now fully vested. Mr.
      Brownlie’s options are exercisable at $.32
      per
      share. 50,000 of Mr. Brownlie’s options vested upon issuance and the balance
      vest upon our achieving “Economic Completion” as that term is defined in the
      loan agreement with Standard Bank plc .





On
      November 30, 2006, our board of directors granted 100,000 common stock options
      to each of John Postle, Ian A. Shaw and Mark T. Nesbitt, our independent
      directors. The options are to purchase shares of our common stock at an exercise
      price of $0.33 per share (the closing price of our common stock on that date)
      for a period of two years. We utilized the Black-Scholes method to fair value
      the 300,000 options received by the directors and recorded approximately $40,000
      as equity based compensation expense.





On
      December 13, 2006, we issued two year options to purchase our common stock
      at an
      exercise price of $0.36 per share to Mr. Brownlie and Mr. Chipman. These options
      are for the purchase of 250,000 shares and 100,000 shares, respectively.  We
      utilized the Black-Scholes method to fair value the 350,000 options received
      by
      these individuals and recorded approximately $48,000 as stock based compensation
      expense.




47





On
      March
      22, 2007, we issued 500,000 shares of common stock to Mr. Brownlie under our
      2006 Equity Incentive Plan. The fair value of the services provided in March
      2007 amounted to $225,000 or $0.45 per share.




In
      May
      2007, we issued an aggregate of 620,455 shares upon the exercise of options
      by
      our officers and directors for gross proceeds of $  137,000
      as follows: 70,455 shares to Gifford A. Dieterle, 50,000 shares to Jeffrey
      W.
      Pritchard, and 250,000 shares each to Roger A. Newell and the wife of Robert
      Roningen.





On
      June
      13, 2007, we issued two year options to purchase our common stock at an exercise
      price of $0.384 per share to Mr. Chipman . These options are for the purchase
      of
      500,000 shares and were issued under the 2006 Equity-Incentive Plan. We utilized
      the Black-Scholes Method to fair value these options and recorded approximately
      $65,000 as equity based compensation expense.





During
      the years ended July 31, 2006, we paid Roger Newell, our V.P. Development,
      $68,500 for professional geologist and management services rendered to us.
      During the years ended July 31, 2006, we paid Jack V. Everett, our V.P.
      Exploration, consulting fees of $88,500. During the years ended July 31, 2007
      and 2006, we paid Robert Roningen, our Senior Vice President, legal and
      consulting fees of $24,000 and $8,000, respectively. ****





We
      utilize Caborca Industrial S.A. de C.V., a Mexican corporation 100% owned by
      Messrs. Dieterle and Pritchard, two of our officers and directors for mining
      support services. These services include but are not limited to the payment
      of
      mining salaries and related costs. Caborca Industrial bills us for these
      services at cost. Mining expenses charged by it amounted to approximately
      $702,000 and $122,000 for the year ended July 31, 2007 and 2006 and eliminate
      upon consolidation.





**Item
      13.**  **Exhibits.**





Exhibits




3.1
            
            Certificate
                of Incorporation of Company.(20)


3.2
            
            Amendments
                to Certificate of Incorporation of
                Company.(17)


3.3
            
            Certificate
                of Merger (Delaware) (which amends our Certificate of
                Incorporation)(20)





3.4
            
            Amended
                and Restated By-Laws of Company(14)





4.1
            
            Specimen certificate representing our Common
              Stock.(8)





4.2
            
            Form
                of Warrant for Common Stock of the Company issued in February 2005
                private
                placement.(7)





4.3
            
            Form
                of Warrant for Common Stock of the Company issued to Standard
                Bank.(9)





4.4
            
            Form
                of Warrant for Common Stock of the Company issued in February and
                March
                2006 private placement.(13)





4.5
            
            Form
                of Warrant for Common Stock of the Company issued in the January
                2007
                private placement.(16)





4.6
            
            Form
                of Placement Agent Warrant for Common Stock of the Company issued
                in the
                January 2007 private placement.(16)





10.1
            
            Mining Claims (1)




48




10.2
            
            Stock Purchase Option Agreement from AngloGold
              (2)  10.3
            
            Letter of Intent with International Northair Mines
              Ltd.
              (2)  10.4
            
            March
                30, 2002 Minera Chanate Stock Purchase and Sale and Security Agreement
                (Sale by us and Holding of all of the stock of Minera Chanate) (In
                Spanish).(3)  10.5
            
            English
                summary of March 30, 2002 Minera Chanate Stock Purchase and Sale
                and
                Security Agreement.(3)  10.6
            
            Agreement between Santa Rita and Grupo Minero
              FG.(4)  10.7
            
            Amendment to Agreement between Santa Rita and Grupo
              Minero FG.(5)  10.8
            
            Termination Agreement between Santa Rita and Grupo
              Minero
              FG.(6)  10.9
            
            English summary of El Charro agreement.
              (10)  10.10
            
            Plan and agreement of merger (reincorporation).
              (11)  10.11
            
            Contract between MSR and Sinergia Obras Civiles
              y
              Mineras, S.A. de C.V.(12)  10.12
            
            Amendment
                to Contract between MSR and Sinergia Obras Civiles y Mineras, S.A.
                de C.V.
                (18)  10.13
            
            Chipman
                Second Amended Engagement Agreement.  10.14
            
            Employment
                Agreement with John Brownlie. (15)  10.15
            
            June
                1, 2006 EPCM agreement between MSR and a Mexican subsidiary of M3
                Engineering & Technology Corporation
                (15)  10.16
            
            Credit
                Agreement dated August 15, 2006 among MSR and Oro, as the borrowers,
                the
                Company, as the guarantor, and Standard Bank PLC, as the lender and
                the
                offshore account holder. (14)  10.17
            
            Employment
                Agreement with Gifford A. Dieterle. (18)  10.18
            
            Employment
                Agreement with Jeffrey W. Pritchard. (18)  10.19
            
            Employment Agreement with J. Scott
              Hazlitt.  10.20
            
            2006
                Equity Incentive Plan. (19)  10.21
            
            Amendment to Employment Agreement with Gifford A.
              Dieterle.  10.22
            
            Amendment to Employment Agreement with Jeffrey W.
              Pritchard.  10.23
            
            Amendment to Employment Agreement with John
              Brownlie.  10.24
            
            Amendment to Employment Agreement with J. Scott
              Hazlitt.  21
            
            Subsidiaries of the Registrant.
              (8)  23.1
            
            Consent
                of Wolinetz, Lafazan & Company, P.C., independent registered public
                accountants.  31.1
            
            Certification
                pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 from the
                Company's Chief Executive Officer  31.2
            
            Certification
                pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 from the
                Company's Chief Financial Officer  32.1
            
            Certification
                pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 from the
                Company's Chief Executive Officer  32.2
            
            Certification
                pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 from the
                Company's Chief Financial Officer







(1)
            Previously
                filed as an exhibit to the Company's Registration Statement on Form
                S-18
                (SEC File No. 2-86160-NY) filed on or about November 10, 1983, and
                incorporated herein by this
                reference.




49




(2)
            Previously
                filed as an exhibit to the Company's Quarterly Report on Form 10-QSB
                for
                the quarter ended January 31, 2001 filed with the Commission on or
                about
                March 16, 2001, and incorporated herein by this
                reference.





(3)
            Previously
                filed as an exhibit to the Company's Quarterly Report on Form 10-QSB
                for
                the quarter ended April 30, 2002 filed with the Commission on or
                about
                June 20, 2002, and incorporated herein by this
                reference.





(4)
            Previously
                filed as an exhibit to the Company's Quarterly Report on Form 10-QSB
                for
                the quarter ended January 31, 2002 filed with the Commission on or
                about
                March 25, 2002, and incorporated herein by this
                reference.





(5)
            Previously
                filed as an exhibit to the Company's Current Report on Form 8-K filed
                with
                the Commission on or about January 22, 2004, and incorporated herein
                by
                this reference.





(6)
              Previously
                  filed as an exhibit to the Company's Current Report on Form 8-K
                  filed with
                  the Commission on or about April 12, 2004, and incorporated herein
                  by this
                  reference.





(7)
            Previously
                filed as an exhibit to the Company's Current Report on Form 8-K filed
                with
                the Commission on or about February 10, 2005, and incorporated herein
                by
                this reference.





(8)
            Previously
                filed as an exhibit to the Company's Registration Statement on Form
                SB-2
                (SEC file no. 333-123216) filed with the Commission on or about March
                9,
                2005, and incorporated herein by this
                reference.





(9)
            Previously
                filed as an exhibit to Amendment No. 1 to the Company's Registration
                Statement on Form SB-2 (SEC file no. 333-123216) filed with the Commission
                on or about June 27, 2005, and incorporated herein by this
                reference.





(10)
            Previously
                filed as an exhibit to the Company's Quarterly Report on Form 10-QSB
                for
                the quarter ended April 30, 2005 filed with the Commission on or
                about
                June 20, 2005, and incorporated herein by this
                reference.





(11)
            Previously
                filed as Appendix B to the Company's Definitive 14A Proxy Statement
                filed
                with the Commission on or about October 7, 2005, and incorporated
                herein
                by this reference.





(12)
            Previously
                filed as an exhibit to the Company's Quarterly Report on Form 10-QSB
                for
                the quarter ended October 31, 2005 filed with the Commission on or
                about
                December 15, 2005, and incorporated herein by this
                reference.





(13)
            Previously
                filed as an exhibit to the Company's Current Report on Form 8-K filed
                with
                the Commission on or about February 16, 2006, and incorporated herein
                by
                this reference.





(14)
            Previously
                filed as an exhibit to the Company's Current Report on Form 8-K filed
                with
                the Commission on or about August 16, 2006, and incorporated herein
                by
                this reference.




50




(15)
            Previously
                filed as an exhibit to the Company's Quarterly Report on Form 10-QSB
                for
                the quarter ended April 30, 2006 filed with the Commission on or
                about
                June 19, 2006, and incorporated herein by this
                reference.





(16)
            Previously
                filed as an exhibit to the Company's Current Report on Form 8-K filed
                with
                the Commission on or about January 29, 2007, and incorporated herein
                by
                this reference.





(17)
            Previously
                filed as an exhibit to the Company's Quarterly Report on Form 10-QSB
                for
                the quarter ended January 31, 2007 filed with the Commission on or
                about
                March 19, 2007, and incorporated herein by this
                reference.





(18)
            Previously
                filed as an exhibit to the Company's Annual Report on Form 10-KSB
                for the
                fiscal year ended July 31, 2006 filed with the Commission on or about
                November 1, 2006, and incorporated herein by this
                reference.





(19)
            Previously
                filed as an exhibit to the Company's Quarterly Report on Form 10-QSB
                for
                the quarter ended October 31, 2006 filed with the Commission on or
                about
                December 19, 2006, and incorporated herein by this
                reference.





(20)
            Previously
                filed as an exhibit to the Company's Registration Statement on Form
                SB-2
                (SEC file no. 333-129939) filed with the Commission on or about November
                23, 2005, and incorporated herein by this
                reference.





Statements
      contained in this Form 10-KSB as to the contents of any agreement or other
      document referred to are not complete, and where such agreement or other
      document is an exhibit to this Report or is included in any forms indicated
      above, each such statement is deemed to be qualified and amplified in all
      respects by such provisions.





**Item
      14.** **Principal
      Accountant Fees And Services.**





All
      audit
      and professional services provided by Wolinetz, Lafazan & Company, P.C.
      (“WL”), Certified Public Accountants, will be approved in advance by the Audit
      Committee to assure such services do not impair the auditor's independence
      from
      us. The total aggregate fees billed by WL were $140,000 and $135,000 for the
      fiscal years ended July 31, 2007 and 2006, respectively. The following table
      shows the detailed fees billed to us by WL for professional services rendered
      during these fiscal years.





**Amount
                ($)****Description
                of Fees**
            
            **2007**
            
            **2006**Audit
                Fees
            
            $
            130,000
            
            $
            128,000Audit-Related
                Fees
            
            
            -
            
            
            -Tax
                Fees
            
            
            10,000
            
            
            7,000All
                Other Fees
            
            
            -
            
            
            -Total
            
            $
            140,000
            
            $
            135,000




51




Audit
      Fees





Represents
      fees for professional services provided for the audit of our annual financial
      statements, services that are performed to comply with generally accepted
      auditing standards, and review of our financial statements included in our
      quarterly reports and services in connection with statutory and regulatory
      filings.




Audit-Related
      Fees





Represents
      the fees for assurance and related services that are reasonably related to
      the
      performance of the audit or review of our financial statements. The Board of
      Directors considers WL to be well qualified to serve as our independent public
      accountants.





The
      Audit
      Committee will pre-approve all auditing services and the terms thereof (which
      may include providing comfort letters in connection with securities
      underwriting) and non-audit services (other than non-audit services prohibited
      under Section 10A(g) of the Exchange Act or the applicable rules of the SEC
      or
      the Public Company Accounting Oversight Board) to be provided to us by the
      independent auditor; provided, however, the pre-approval requirement is waived
      with respect to the provisions of non-audit services for us if the "de minimus"
      provisions of Section 10A(i)(1)(B) of the Exchange Act are satisfied. This
      authority to pre-approve non-audit services may be delegated to one or more
      members of the Audit Committee, who shall present all decisions to pre-approve
      an activity to the full Audit Committee at its first meeting following such
      decision. The Audit Committee may review and approve the scope and staffing
      of
      the independent auditors' annual audit plan.





Tax
      Fees





This
      represents professional services rendered for tax compliance, tax advice and
      tax
      planning.





All
      Other
      Fees





WL
      was
      paid no other fees for professional services during the fiscal years ended
      July
      31, 2007 and 2006.




52


**SIGNATURES**





Pursuant
      to the requirements of Section 13 or 15(d) of the Securities Exchange Act
      of 1934, the registrant has duly caused this report to be signed on its behalf
      by the undersigned, thereunto duly authorized.


CAPITAL
              GOLD
              CORPORATIONDated:
              October 22, 2007
            By:
            /s/ Gifford A. DieterleGifford
              A. Dieterle,
              President




Pursuant
      to the requirements of the Securities Exchange Act of 1934, this report has
      been
      signed below by the following persons on behalf of the registrant and in the
      capacities and on the dates indicated.





SIGNATURES
            
            TITLE
            
            DATE/s/
                Gifford A. Dieterle
            
            President,
            
            October
                22, 2007Gifford
                A. Dieterle
            
            Treasurer,and
                Chairman of the Board of Directors/s/
                Christopher M. Chipman
            
            Principal
                FinancialChristopher
                M. Chipman
            
            and
                Accounting Officer
            
            October
                22, 2007/s/
Robert
              N. Roningen
            
            Director
            
            October 23,
                2007Robert
                N. Roningen/s/
                John Brownlie
            
            Director
            
            October
                22, 2007John
                BrownlieDirector
            
            October, 2007Roger
                A. Newell/s/
                Jeffrey W. Pritchard
            
            Director
            
            October
                22, 2007Jeffrey
                W. Pritchard/s/
                John Postle
            
            Director
            
            October
                22, 2007John
                Postle/s/
                Ian Shaw
            
            Director
            
            October
                22, 2007Ian
                Shaw/s/
                Mark T. Nesbitt
            
            Director
            
            October
                22, 2007Mark
                T. Nesbitt




53




SUPPLEMENTAL
      INFORMATION





Supplemental
      Information to be Furnished With Reports Filed Pursuant to Section 15(d) of
      the Act by Registrants Which Have Not Registered Securities Pursuant to
      Section 12 of the Act.







NOT
      APPLICABLE.




54





REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To
      The
      Board of Directors and Stockholders of


Capital
      Gold Corporation


New
      York,
      New York





We
      have
      audited the accompanying consolidated balance sheet of Capital Gold Corporation
      and Subsidiaries (“the Company”) as of July 31, 2007, and the related
      consolidated statements of operations, changes in stockholders’ equity and cash
      flows for each of the two years in the period ended July 31, 2007. These
      consolidated financial statements are the responsibility of the Company’s
      management. Our responsibility is to express an opinion on these financial
      statements based on our audits.





We
      conducted our audits in accordance with standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. The Company is not required to
      have, nor were we engaged to perform, an audit of its internal control over
      financial reporting. Our audit included consideration of internal control over
      financial reporting as a basis for designing audit procedures that are
      appropriate in the circumstance, but not for the purpose of expressing an
      opinion on the effectiveness of the Company’s internal control over financial
      reporting. Accordingly, we express no such opinion. Also, an audit includes
      examining, on a test basis, evidence supporting the amounts and disclosures
      in
      the financial statements. An audit also includes assessing the accounting
      principles used and significant estimates made by management, as well as
      evaluating the overall financial statement presentation. We believe that our
      audits provide a reasonable basis for our opinion.





In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the consolidated financial position of Capital Gold
      Corporation and Subsidiaries as of July 31, 2007 and the consolidated results
      of
      their operations and their cash flows for each of the two years in the period
      ended July 31, 2007 in conformity with accounting principles generally accepted
      in the United States of America.





WOLINETZ,
      LAFAZAN & COMPANY, P.C.





Rockville
      Centre, New York


October
      12, 2007





F-1




CAPITAL
                GOLD CORPORATIONCONSOLIDATED
                BALANCE SHEET
              JULY
                31, 2007




ASSETSCurrent
                Assets:Cash
                and Cash Equivalents
            
            $
            2,225,482Loans
                Receivable - Affiliate (Note 12 and 16)
            
            
            46,995Prepaid
                Expenses
            
            
            72,216Marketable
                Securities (Note 3)
            
            
            90,000Stockpiles
                and Ore on Leach Pads (Note 5)
            
            
            2,996,459Material
                and Supply Inventories (Note 4)
            
            
            174,164Deposits
                (Note 6)
            
            
            878,694Other
                Current Assets (Note 7)
            
            
            1,675,236Total
                Current Assets
            
            
            8,159,246Mining
                Concessions (Note 11)
            
            
            67,441Property
                & Equipment - net (Note 8)
            
            
            18,000,285Intangible
                Assets - net (Note 9)
            
            
            576,867Other
                Assets:Other
                Investments (Note 13)
            
            
            28,052Deferred
                Financing Costs (Note 18)
            
            
            581,420Mining
                Reclamation Bonds (Note 10)
            
            
            35,550Other
            
            
            42,285Security
                Deposits
            
            
            59,995Total
                Other Assets
            
            
            747,302Total
                Assets
            
            $
            27,551,141LIABILITIES
                AND STOCKHOLDERS’ EQUITYCurrent
                Liabilities:Accounts
                Payable
            
            $
            617,216Accrued
                Expenses
            
            
            603,063Derivative
                Contracts (Note 21)
            
            
            595,623Total
                Current Liabilities
            
            
            1,815,902Reclamation
                and Remediation Liabilities (Note 14)
            
            
            1,249,103Note
                Payable (Note 18)
            
            
            12,500,000Total
                Long-term Liabilities
            
            
            13,749,103Commitments
                and ContingenciesStockholders’
                Equity:Common
                Stock, Par Value $.0001 Per Share;Authorized
                250,000,000 shares; Issued andOutstanding
                168,173,148 shares
            
            
            16,817Additional
                Paid-In Capital
            
            
            54,016,375Accumulated
                Deficit
            
            
            (38,860,641
            )Deferred
                Financing Costs (Note 18)
            
            
            (3,438,058
            )Deferred
                Compensation
            
            
            (52,500
            )Accumulated
                Other Comprehensive Income (Note 15)
            
            
            304,143Total
                Stockholders’ Equity
            
            
            11,986,136Total
                Liabilities and Stockholders’ Equity
            
            $
            27,551,141The
                accompanying notes are an integral part of the financial
                statements.





F-2


CAPITAL
                GOLD CORPORATIONCONSOLIDATED
                STATEMENT OF OPERATIONS




For
                The Years EndedJuly
                31,2007
            
            2006Revenues
            
            $
            -
            
            $
            -Costs
                and Expenses:Mine
                Expenses
            
            
            1,007,789
            
            
            1,940,805Selling,
                General and Administrative Expenses
            
            
            2,760,085
            
            
            2,135,493Equity
                Based Compensation
            
            
            133,015
            
            
            89,391Exploration
            
            
            808,488
            
            
            -Depreciation
                and Amortization
            
            
            891,104
            
            
            38,969Total
                Costs and Expenses
            
            
            5,600,481
            
            
            4,204,658Loss
                from Operations
            
            
            (5,600,481
            )
            
            (4,204,658
            )Other
                Income (Expense):Interest
                Income
            
            
            145,993
            
            
            183,719Interest
                Expense
            
            
            (792,146
            )
            
            -Loss
                on Sale of Property and Equipment
            
            
            -
            
            
            (201,829
            )Loss
                on change in fair value of derivative
            
            
            (1,225,504
            )
            
            (581,924
            )Total
                Other Income (Expense)
            
            
            (1,871,657
            )
            
            (600,034
            )Net
                Loss
            
            $
            (7,472,138
            )
            $
            (4,804,692
            )Net
                Loss Per Common Share - Basic and Diluted
            
            $
            (0.05
            )
            $
            (0.04
            )Weighted
                Average Common Shares Outstanding
            
            
            149,811,266
            
            
            112,204,471The
                accompanying notes are an integral part of the financial
                statements.





F-3


CAPITAL
                GOLD CORPORATIONCONSOLIDATED
                STATEMENT OF STOCKHOLDERS’ EQUITY




AccumulatedOtherCommon
                Stock
            
            Additional
            
            
            
            Comprehensive
            
            Deferred
            
            
            
            TotalShares
            
            Amount
            
            paid-in-
                  capital
            
            Accumulated
              Deficit
            
            Income/
              (Loss)
            
            Financing
                  Costs
            
            Deferred
                  Compensation
            
            Stockholders’
                  EquityBalance
                at July 31, 2005
            
            
            95,969,216
            
            
            95,969
            
            
            31,851,724
            
            
            (26,583,811
            )
            
            157,714
            
            
            (252,541
            )
            
            -
            
            
            5,269,055Change
                in par value to $0.0001
            
            
            -
            
            
            (86,372
            )
            
            86,372
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Deferred
                Financing Costs
            
            
            1,000,000
            
            
            100
            
            
            269,900
            
            
            -
            
            
            -
            
            
            (270,000
            )
            
            -
            
            
            -Issuance
                    of common stock upon warrant and option exercises,
                    net
            
            
            4,825,913
            
            
            482
            
            
            741,338
            
            
            
            
            
            -
            
            
            
            
            
            -
            
            
            741,820Issuance
                    of common stock upon warrant and option exercises,
                    net
            
            
            8,600,000
            
            
            860
            
            
            2,372,740
            
            
            
            
            
            -
            
            
            
            
            
            -
            
            
            2,373,600Private
                placement, net
            
            
            21,240,000
            
            
            2,124
            
            
            4,997,376
            
            
            -
            
            
            -
            
            
            
            
            
            -
            
            
            4,999,500Options
                and warrants issued for services
            
            
            
            
            
            
            
            
            414,375
            
            
            -
            
            
            
            
            
            
            
            
            (52,500
            )
            
            361,875Unrealized
                loss on marketable securities
            
            
            -
            
            
            -
            
            
            -
            
            
            
            
            
            (60,000
            )
            
            
            
            
            -
            
            
            (60,000
            )Equity
                adjustment from foreign currency translation
            
            
            
            
            
            
            
            
            
            
            
            -
            
            
            48,779
            
            
            
            
            
            -
            
            
            48,779Net
                loss for the year ended July 31, 2006
            
            
            -
            
            
            -
            
            
            -
            
            
            (4,804,692
            )
            
            -
            
            
            
            
            
            -
            
            
            (4,804,692
            )Balance
                - July 31, 2006
            
            
            131,635,129
            
            
            13,163
            
            
            40,733,825
            
            
            (31,388,503
            )
            
            146,493
            
            
            (522,541
            )
            
            (52,500
            )
            
            8,929,937





The
      accompanying notes are an integral part of the financial statements .




F-4





CAPITAL
                GOLD CORPORATIONCONSOLIDATED
                STATEMENT OF STOCKHOLDERS’ EQUITY -
                CONTINUED




AccumulatedOtherCommon
                Stock
            
            Additional
            
            
            
            Comprehensive
            
            Deferred
            
            
            
            TotalShares
            
            Amount
            
            paid-in-
                  capital
            
            Accumulated
              Deficit
            
            Income/
              (Loss)
            
            Financing
                  Costs
            
            Deferred
                  Compensation
            
            Stockholders’
                  EquityBalance
                at July 31, 2006
            
            
            131,635,129
            
            
            13,163
            
            
            40,733,825
            
            
            (31,388,503
            )
            
            146,493
            
            
            (522,541
            )
            
            (52,500
            )
            
            8,929,937Deferred
                Financing Costs
            
            
            1,150,000
            
            
            115
            
            
            350,635
            
            
            -
            
            
            -
            
            
            (350,750
            )
            
            -
            
            
            -Deferred
                Financing Costs
            
            
            -
            
            
            -
            
            
            3,314,449
            
            
            -
            
            
            -
            
            
            (3,314,449
            )
            
            -
            
            
            -Amortization
                of Deferred Finance Costs
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            749,682
            
            
            -
            
            
            749,682Options
                and warrants issued for services
            
            
            -
            
            
            -
            
            
            215,670
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            215,670Private
                Placement, Net
            
            
            12,561,667
            
            
            1,257
            
            
            3,484,606
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            3,485,863Common
                Stock issued for services provided
            
            
            622,443
            
            
            62
            
            
            276,187
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            276,249Common
                Stock issued upon the exercising of options and warrants
            
            
            22,203,909
            
            
            2,220
            
            
            5,641,003
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            5,643,223Change
                in fair value on interest rate swaps
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (47,343
            )
            
            -
            
            
            -
            
            
            (47,343
            )Equity
                adjustment from foreign currency translation
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            204,993
            
            
            -
            
            
            -
            
            
            204,993Net
                loss for the year ended July 31, 2007
            
            
            -
            
            
            -
            
            
            -
            
            
            (7,472,138
            )
            
            -
            
            
            
            
            
            -
            
            
            (7,472,138
            )Balance
                at July 31, 2007
            
            
            168,173,148
            
            $
            16,817
            
            $
            54,016,375
            
            $
            (38,860,641
            )
            $
            304,143
            
            $
            (3,438,058
            )
            $
            (52,500
            )
            $
            11,986,136





The
      accompanying notes are an integral part of the financial statements .




F-5


CAPITAL
                GOLD CORPORATIONCONSOLIDATED
                STATEMENT OF CASH FLOWS


For
                  TheYears
                  EndedJuly
                  31,2007
              
              2006Cash
                  Flow From Operating Activities:Net
                  Loss
              
              $
              (7,472,138
              )
              $
              (4,804,692
              )Adjustments
                  to Reconcile Net Loss toNet
                  Cash Provided by (Used in) Operating Activities:Depreciation
                  and Amortization
              
              
              891,104
              
              
              38,969Accretion
                  of Reclamation Obligation
              
              
              30,788
              
              
              -Loss
                  on Sale of Property and Equipment
              
              
              -
              
              
              201,829Loss
                  on change in fair value of derivative
              
              
              766,356
              
              
              581,924Value
                  of Common Stock and Warrants Issued forServices
              
              
              491,919
              
              
              361,875Changes
                  in Operating Assets and Liabilities:(Increase)
                  Decrease in Prepaid Expenses
              
              
              (32,142
              )
              
              (21,082
              )(Increase)
                  Decrease in Inventory
              
              
              (2,458,297
              )
              
              -(Increase)
                  Decrease in Other Current Assets
              
              
              2,974,848
              
              
              (5,243,003
              )(Increase)
                  in Other Deposits
              
              
              (628,694
              )
              
              (170,000
              )(Increase)
                  Decrease in Other Assets
              
              
              (49,629
              )
              
              755Increase
                  in Accounts Payable
              
              
              358,245
              
              
              166,932Increase
                  in Reclamation and Remediation Obligation
              
              
              1,218,315
              
              
              -Increase
                  in Accrued Expenses
              
              
              246,393
              
              
              165,895Net
                  Cash Used in Operating Activities
              
              
              (3,662,932
              )
              
              (8,720,598
              )Cash
                  Flow From Investing Activities:(Increase)
                  in Other Investments
              
              
              (3,909
              )
              
              (260
              )Purchase
                  of Mining, Milling and Other Property andEquipment
              
              
              (17,850,734
              )
              
              (810,425
              )Purchase
                  of Intangibles
              
              
              (570,000
              )
              
              (89
              )Proceeds
                  on Sale of Mining, Milling and Other Propertyand
                  Equipment
              
              
              -
              
              
              192,000Net
                  Cash Used in Investing Activities
              
              
              (18,424,643
              )
              
              (618,774
              )


The
                accompanying notes are an integral part of the financial
                statements.





F-6





CAPITAL
                GOLD CORPORATIONCONSOLIDATED
                STATEMENT OF CASH FLOWS - CONTINUED




For
                TheYears
                EndedJuly
                31,2007
            
            2006Cash
                Flow From Financing Activities:Advances
                to Affiliate
            
            
            (5,250
            )
            
            (10,326
            )Proceeds
                from Borrowing on Credit Facility
            
            
            12,500,000Proceeds
                From Issuance of Common Stock, net
            
            
            9,129,087
            
            
            8,114,920Deferred
                Finance Costs
            
            
            (257,271
            )
            
            (350,777
            )Net
                Cash Provided By (Used In) Financing Activities
            
            
            21,366,566
            
            
            7,753,817Effect
                of Exchange Rate Changes
            
            
            204,992
            
            
            45,506Increase
                (Decrease) In Cash and Cash Equivalents
            
            
            (516,017
            )
            
            (1,540,049
            )Cash
                and Cash Equivalents - Beginning
            
            
            2,741,499
            
            
            4,281,548Cash
                and Cash Equivalents - Ending
            
            $
            2,225,482
            
            $
            2,741,499Supplemental
                Cash Flow Information:Cash
                Paid For Interest
            
            $
            878,505
            
            $
            -Cash
                Paid For Income Taxes
            
            $
            22,968
            
            $
            15,099Non-Cash
                Financing Activities:Issuance
                of common stock and warrants as payment of financing costs
            
            $
            3,665,199
            
            $
            270,000Change
                in Fair Value of Derivative Instrument
            
            $
            47,343
            
            $
            -The
                accompanying notes are an integral part of the financial
                statements.





F-7




CAPITAL
      GOLD CORPORATION


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


JULY
      31,
      2007





NOTE
      1 -
      Basis of Presentation





Capital
      Gold Corporation ("Capital Gold", "the Company", "we" or "us") was incorporated
      in February 1982 in the State of Nevada. During March 2003 the Company's
      stockholders approved an amendment to the Articles of Incorporation to change
      its name from Leadville Mining and Milling Corp. to Capital Gold Corporation.
      In
      November 2005, the Company reincorporated in Delaware. The Company owns rights
      to property located in the State of Sonora, Mexico and the California Mining
      District, Lake County, Colorado. The Company is engaged in the exploration,
      development and production for gold and other minerals from its properties
      in
      Mexico. All of the Company's mining activities are being performed in Mexico.





On
      June
      29, 2001, the Company exercised an option and purchased from AngloGold North
      America Inc. and AngloGold (Jerritt Canyon) Corp. 100% of the issued and
      outstanding stock of Minera Chanate, S.A. de C.V., a subsidiary of those two
      companies (“Minera Chanate”). Minera Chanate's assets consisted of certain
      exploitation and exploration concessions in the States of Sonora, Chihuahua
      and
      Guerrero, Mexico. These concessions are sometimes referred to as the El Chanate
      Concessions.





Pursuant
      to the terms of the agreement, on December 15, 2001, the Company made a $50,000
      payment to AngloGold. AngloGold will be entitled to receive the remainder of
      the
      purchase price by way of an ongoing percentage of net smelter returns of between
      2% and 4% plus 10% net profits interest (until the total net profits interest
      payment received by AngloGold equals $1,000,000). AngloGold's right to a payment
      of a percentage of net smelter returns and the net profits interest will
      terminate at such point as they aggregate $18,018,355. In accordance with the
      agreement, the foregoing payments are not to be construed as royalty payments.
      Should the Mexican government or other jurisdiction determine that such payments
      are royalties, the Company could be subject to and would be responsible for
      any
      withholding taxes assessed on such payments.





Under
      the
      terms of the agreement, the Company has granted AngloGold the right to designate
      one of its wholly-owned Mexican subsidiaries to receive a one time option to
      purchase 51% of Minera Chanate (or such entity that owns the Minera Chanate
      concessions at the time of option exercise). That Option is exercisable over
      a
      180 day period commencing at such time as the Company notifies AngloGold that
      it
      has made a good faith determination that it has gold-bearing ore deposits on
      any
      one of the identified group of El Chanate Concessions, when aggregated with
      any
      ore that the Company has mined, produced and sold from such concessions, of
      in
      excess of 2,000,000 troy ounces of contained gold. The exercise price would
      equal twice the Company's project costs on the properties during the period
      commencing on December 15, 2000 and ending on the date of such
      notice.





During
      the fiscal year ended July 31, 2007, The Company exited the development stage
      since principal operations have commenced.




F-8


NOTE
      2 -
      Summary of Significant Accounting Policies





Principals
      of Consolidation





The
      consolidated financial statements include the accounts of Capital Gold
      Corporation and its wholly owned and majority owned subsidiaries, Leadville
      Mining and Milling Holding Corporation, Minera Santa Rita, S.A de R.L. de
      C.V.(“MSR”) and Oro de Altar S. de R. L. de C.V. (“Oro”) as well as the accounts
      within Caborca Industrial S.A. de C.V. (“Caborca Industriale”), a Mexican
      corporation 100% owned by two of the Company’s officers and directors for mining
      support services. These services include, but are not limited to, the payment
      of
      mining salaries and related costs. Caborca Industrial bills the Company for
      these services at cost. This entity is considered a variable interest entity
      under accounting rules provided under FIN 46, “Consolidation of Variable
      Interest Entities”. All significant intercompany accounts and transactions are
      eliminated in consolidation.





Cash
      and Cash Equivalents





The
      Company considers highly liquid investments with original maturities of three
      months or less from the date of purchase to be cash equivalents. Cash and cash
      equivalents include money market funds and/or short term U.S. treasury
      bonds.





Marketable
      Securities





The
      Company accounts for its investments in marketable securities in accordance
      with
      Statement of Financial Accounting Standards No. 115, "Accounting for Certain
      Investments in Debt and Equity Securities."





Management
      determines the appropriate classification of all securities at the time of
      purchase and re-evaluates such designation as of each balance sheet date. The
      Company has classified its marketable equity securities as available for sale
      securities and has recorded such securities at fair value. The Company uses
      the
      specific identification method to determine realized gains and losses.
      Unrealized holding gains and losses are excluded from earnings and, until
      realized, are reported as a separate component of stockholders'
      equity.




Stockpiles,
      Ore on Leach Pads and Inventories (“In-Process Inventory”)




Costs
      that are incurred in or benefit the productive process are accumulated as
      stockpiles, ore on leach pads and inventories. Stockpiles, ore on leach pads
      and
      inventories are carried at the lower of average cost or net realizable value.
      Net realizable value represents the estimated future sales price of the product
      based on current and long-term metals prices, less the estimated costs to
      complete production and bring the product to sale. Write-downs of stockpiles,
      ore on leach pads and inventories, resulting from net realizable value
      impairments, are reported as a component of *Costs
      applicable to sales* .
      The
      current portion of stockpiles, ore on leach pads and inventories is determined
      based on the expected amounts to be processed within the next 12 months.
      Stockpiles, ore on leach pads and inventories not expected to be processed
      within the next 12 months are classified as long-term. The major
      classifications are as follows:




*Stockpiles*




Stockpiles
      represent ore that has been mined and is available for further processing.
      Stockpiles are measured by estimating the number of tons added and removed
      from
      the stockpile, the number of contained ounces or pounds (based on assay data)
      and the estimated metallurgical recovery rates (based on the expected processing
      method). Stockpile ore tonnages are verified by periodic surveys. Costs are
      allocated to stockpiles based on relative values of material stockpiled and
      processed using current mining costs incurred up to the point of stockpiling
      the
      ore, including applicable overhead, depreciation, depletion and amortization
      relating to mining operations, and removed at each stockpile’s average cost per
      recoverable unit.




F-9




*Ore
      on Leach Pads*




The
      recovery of gold from certain gold oxide ores is achieved through the heap
      leaching process. Under this method, oxide ore is placed on leach pads where
      it
      is treated with a chemical solution, which dissolves the gold contained in
      the
      ore. The resulting “pregnant” solution is further processed in a plant where the
      gold is recovered. Costs are added to ore on leach pads based on current mining
      costs, including applicable depreciation, depletion and amortization relating
      to
      mining operations. Costs are removed from ore on leach pads as ounces are
      recovered based on the average cost per estimated recoverable ounce of gold
      on
      the leach pad.




The
      estimates of recoverable gold on the leach pads are calculated from the
      quantities of ore placed on the leach pads (measured tons added to the leach
      pads), the grade of ore placed on the leach pads (based on assay data) and
      a
      recovery percentage (based on ore type). In general, leach pads recover
      approximately 50% to 95% of the recoverable ounces in the first year of
      leaching, declining each year thereafter until the leaching process is complete.




Although
      the quantities of recoverable gold placed on the leach pads are reconciled
      by
      comparing the grades of ore placed on pads to the quantities of gold actually
      recovered (metallurgical balancing), the nature of the leaching process
      inherently limits the ability to precisely monitor inventory levels. As a
      result, the metallurgical balancing process needs to be constantly monitored
      and
      estimates need to be refined based on actual results over time. The Company’s
      operating results may be impacted by variations between the estimated and actual
      recoverable quantities of gold on its leach pads. Variations between actual
      and
      estimated quantities resulting from changes in assumptions and estimates that
      do
      not result in write-downs to net realizable value will be accounted for on
      a
      prospective basis.




*In-process
      Inventory*




In-process
      inventories represent materials that are currently in the process of being
      converted to a saleable product. Conversion processes vary depending on the
      nature of the ore and the specific processing facility, but include mill
      in-circuit, leach in-circuit, flotation and column cells and carbon in-pulp
      inventories. In-process material will be measured based on assays of the
      material fed into the process and the projected recoveries of the respective
      plant. In-process inventories will be valued at the average cost of the material
      fed into the process attributable to the source material coming from the mines,
      stockpiles and/or leach pads plus the in-process conversion costs, including
      applicable depreciation relating to the process facilities incurred to that
      point in the process.




*Precious
      Metals Inventory*




Precious
      metals inventories will include gold doré and/or gold bullion. Precious metals
      that result from the Company’s mining and processing activities will be valued
      at the average cost of the respective in-process inventories incurred prior
      to
      the refining process, plus applicable refining costs.




*Concentrate
      Inventory*




Concentrate
      inventories represent gold concentrate available for shipment. The Company
      will
      value concentrate inventory at the average cost, including an allocable portion
      of refinery support costs and refining depreciation. Costs will be added and
      removed to the concentrate inventory based on tons of concentrate and will
      be
      valued at the lower of average cost or net realizable value.




F-10




*Materials
      and Supplies*




Materials
      and supplies are valued at the lower of average cost or net realizable value.
      Cost includes applicable taxes and freight.




Property,
      Plant and Mine Development




Expenditures
      for new facilities or equipment and expenditures that extend the useful lives
      of
      existing facilities or equipment are capitalized and depreciated using the
      straight-line method at rates sufficient to depreciate such costs over the
      estimated productive lives, which do not exceed the related estimated mine
      lives, of such facilities based on proven and probable reserves.




Mineral
      exploration costs are expensed as incurred. When it has been determined that
      a
      mineral property can be economically developed as a result of establishing
      proven and probable reserves, costs incurred prospectively to develop the
      property are capitalized as incurred and are amortized using the
      units-of-production (“UOP”) method over the estimated life of the ore body based
      on estimated recoverable ounces or pounds in proven and probable reserves.




Impairment
      of Long-Lived Assets




The
      Company reviews and evaluates its long-lived assets for impairment when events
      or changes in circumstances indicate that the related carrying amounts may
      not
      be recoverable. An impairment is considered to exist if the total estimated
      future cash flows on an undiscounted basis are less than the carrying amount
      of
      the assets, including goodwill, if any. An impairment loss is measured and
      recorded based on discounted estimated future cash flows. Future cash flows
      are
      estimated based on quantities of recoverable minerals, expected gold and other
      commodity prices (considering current and historical prices, price trends and
      related factors), production levels and operating costs of production and
      capital, all based on life-of-mine plans. Existing proven and probable reserves
      and value beyond proven and probable reserves, including mineralization other
      than proven and probable reserves and other material that is not part of the
      resource base, are included when determining the fair value of mine site
      reporting units at acquisition and, subsequently, in determining whether the
      assets are impaired. The term “recoverable minerals” refers to the estimated
      amount of gold or other commodities that will be obtained after taking into
      account losses during ore processing and treatment. Estimates of recoverable
      minerals from exploration stage mineral interests are risk adjusted based on
      management’s relative confidence in such materials. In estimating future cash
      flows, assets are grouped at the lowest level for which there are identifiable
      cash flows that are largely independent of future cash flows from other asset
      groups. The Company’s estimates of future cash flows are based on numerous
      assumptions and it is possible that actual future cash flows will be
      significantly different than the estimates, as actual future quantities of
      recoverable minerals, gold and other commodity prices, production levels and
      operating costs of production and capital are each subject to significant risks
      and uncertainties.




Reclamation
      and Remediation Costs (“Asset Retirement Obligations”)




Reclamation
      costs are allocated to expense over the life of the related assets and are
      periodically adjusted to reflect changes in the estimated present value
      resulting from the passage of time and revisions to the estimates of either
      the
      timing or amount of the reclamation and abandonment costs. The Asset Retirement
      Obligation is based on when the spending for an existing environmental
      disturbance and activity to date will occur. The Company reviews, on an annual
      basis, unless otherwise deemed necessary, the Asset Retirement Obligation at
      its
      mine site in accordance with FASB FAS No. 143, “Accounting for Asset
      Retirement Obligations.”




F-11




Deferred
      Financing Costs





Deferred
      financing costs which were included in other assets and a component of
      stockholders’ equity relate to costs incurred in connection with bank borrowings
      and are amortized over the term of the related borrowings.




Intangible
      Assets





Purchased
      intangible assets consisting of rights of way, easements and net profit
      interests are carried at cost less accumulated amortization. Amortization is
      computed using the straight-line method over the economic lives of the
      respective assets, generally five years or using the units of production method.
      It is the Company’s policy to assess periodically the carrying amount of its
      purchased intangible assets to determine if there has been an impairment to
      their carrying value. Impairments of other intangible assets are determined
      in
      accordance with SFAS 144. There was no impairment at July 31, 2007.





Fair
      Value of Financial Instruments





The
      carrying value of the Company's financial instruments, including cash and cash
      equivalents, loans receivable and accounts payable approximated fair value
      because of the short maturity of these instruments.





Revenue
      Recognition





Revenue
      will be recognized, net of treatment and refining charges, from a sale when
      the
      price is determinable, the product has been delivered, the title has been
      transferred to the customer and collection of the sales price is reasonably
      assured. Revenues from by-product sales will be credited to *Costs
      applicable to sales* as a
      by-product credit.





Foreign
      Currency Translation





Assets
      and liabilities of the Company's Mexican subsidiaries are translated to US
      dollars using the current exchange rate for assets and liabilities. Amounts
      on
      the statement of operations are translated at the average exchange rates during
      the year. Gains or losses resulting from foreign currency translation are
      included as a component of other comprehensive income (loss).




Comprehensive
      Income (Loss)





Comprehensive
      income (loss) which is reported on the accompanying consolidated statement
      of
      stockholders' equity as a component of accumulated other comprehensive income
      (loss) consists of accumulated foreign translation gains and losses and net
      unrealized gains and losses on available-for-sale securities.





Income
      Taxes





The
      Company adopted the provisions of FASB Interpretation No. 48, "Accounting for
      Uncertainty in Income Taxes" ("FIN 48") effective January 1, 2007. The purpose
      of FIN 48 is to clarify and set forth consistent rules for accounting for
      uncertain tax positions in accordance with Statement of Financial Accounting
      Standards No. 109, "Accounting for Income Taxes". The cumulative effect of
      applying the provisions of this interpretation are required to be reported
      separately as an adjustment to the opening balance of retained earnings in
      the
      year of adoption. The adoption of this standard did not have an impact on the
      financial condition or the results of the Company’s operations.




F-12





Deferred
      income tax assets and liabilities are determined based on differences between
      the financial statement reporting and tax bases of assets and liabilities and
      are measured using the enacted tax rates and laws in effect when the differences
      are expected to reverse. The measurement of deferred income tax assets is
      reduced, if necessary, by a valuation allowance for any tax benefits, which
      are
      not expected to be realized. The effect on deferred income tax assets and
      liabilities of a change in tax rates is recognized in the period that such
      tax
      rate changes are enacted.





Equity
      Based Compensation





In
      connection with offers of employment to the Company’s executives as well as in
      consideration for agreements with certain consultants, the Company issues
      options and warrants to acquire its common stock. Employee and non-employee
      awards are made at the discretion of the Board of Directors.





Such
      options and warrants may be exercisable at varying exercise prices currently
      ranging from $0.24 to $0.45 per share of common stock with certain of these
      grants becoming exercisable immediately upon grant subject to stockholder
      approval. Certain grants vest for a period of five months to two years
      (generally concurrent with service periods for grants to employees/consultants
      -
      See Note 20 - Employee and Consulting Agreements). Certain grants contain a
      provision whereby they become immediately exercisable upon a change of
      control.





Effective
      February 1, 2006, the Company adopted the provisions of SFAS No. 123R. Under
      FAS
      123R, share-based compensation cost is measured at the grant date, based on
      the
      estimated fair value of the award, and is recognized as expense over the
      requisite service period. The Company adopted the provisions of FAS 123R using
      a
      modified prospective application. Under this method, compensation cost is
      recognized for all share-based payments granted, modified or settled after
      the
      date of adoption, as well as for any unvested awards that were granted prior
      to
      the date of adoption. Prior periods are not revised for comparative purposes.
      Because the Company previously adopted only the pro forma disclosure provisions
      of SFAS 123, it will recognize compensation cost relating to the unvested
      portion of awards granted prior to the date of adoption, using the same estimate
      of the grant-date fair value and the same attribution method used to determine
      the pro forma disclosures under SFAS 123, except that forfeitures rates will
      be
      estimated for all options, as required by FAS 123R.





The
      cumulative effect of applying the forfeiture rates is not material. FAS 123R
      requires that excess tax benefits related to stock options exercises be
      reflected as financing cash inflows instead of operating cash
      inflows.





The
      fair
      value of each option award is estimated on the date of grant using a
      Black-Scholes option valuation model. Expected volatility is based on the
      historical volatility of the price of the Company stock. The risk-free interest
      rate is based on U.S. Treasury issues with a term equal to the expected life
      of
      the option. The Company uses historical data to estimate expected dividend
      yield, expected life and forfeiture rates. The estimated per share weighted
      average grant-date fair values of stock options and warrants granted during
      the
      years ended July 31, 2007 and 2006, were $0.33 and $0.35, respectively. The
      fair
      values of the options and warrants granted were estimated based on the following
      weighted average assumptions:





Years
                ended July 31,2007
            
            2006Expected
                volatility
            
            73%
            
            95%
                - 165%Risk-free
                interest rate
            
            5.75%
            
            5.75%Expected
                dividend yield
            
            -
            
            -Expected
                life
            
            2.4
                years
            
            1-2
                years





F-13




Stock
                option and warrant activity for employees during the year ended July
                31,
                2007 is as follows:




Number
                of
              Options
            
            Weighted
              Average
              exercise
              price
            
            Weighted
              average
              remaining
              contracted
              term
                (years)
            
            Aggregate
              intrinsic
              valueOutstanding
                at July 31, 2005
            
            
            4,711,363
            
            $
            .30
            
            
            0.30
            
            $
            1,277,977Options
                granted
            
            
            4,611,363
            
            
            .13
            
            
            -
            
            
            -Options
                exercised
            
            
            (590,909
            )
            
            .05
            
            
            -
            
            
            -Options
                expired
            
            
            (3,161,363
            )
            
            .05
            
            
            -
            
            
            -Warrants
                and options outstanding at July 31, 2006
            
            
            5,570,454
            
            $
            .16
            
            
            1.17
            
            $
            702,250Options
                granted
            
            
            1,050,000
            
            $
            .36
            
            
            -
            
            
            -Options
                exercised
            
            
            (3,570,909
            )
            $
            .08
            
            
            -
            
            
            -Options
                expired
            
            
            (549,545
            )
            $
            .22
            
            
            -
            
            
            -Warrants
                and options outstanding at July 31, 2007
            
            
            2,500,000
            
            $
            .34
            
            
            1.20
            
            $
            255,000Warrants
                and options exercisable at July 31, 2007
            
            
            2,350,000
            
            $
            .34
            
            
            1.12
            
            $
            237,000




Unvested
                stock option and warrant balances for employees at July 31, 2007
                are as
                follows:




Number
                of Options
            
            Weighted
              Average
              Exercise
              price
            
            Weighted
              average
              remaining
              contracted
              term
                (years)
            
            Aggregate
              Intrinsic
                valueOutstanding
                at August 1, 2006
            
            
            -
            
            
            -
            
            
            -
            
            $
            -Options
                granted
            
            
            150,000
            
            $
            .32
            
            
            0.92
            
            
            18,000Unvested
                Options outstanding at July 31, 2007
            
            
            150,000
            
            $
            .32
            
            
            0.92
            
            $
            18,000




F-14




Stock
                option and warrant activity for non-employees during the year ended
                July
                31, 2007 is as follows:




Number
                of Options
            
            Weighted
              Average
              Exercise
              price
            
            Weighted
              average
              remaining
              contracted
              term
                (years)
            
            Aggregate
              Intrinsic
                valueOutstanding
                at July 31, 2005
            
            
            31,902,004
            
            $
            .30
            
            
            1.13
            
            $
            3,430,120Options
                granted
            
            
            6,844,000
            
            
            .28
            
            
            -
            
            
            -Options
                exercised
            
            
            (12,835,004
            )
            
            .29
            
            
            -
            
            
            -Options
                expired
            
            
            (350,000
            )
            
            .10
            
            
            -
            
            
            -Warrants
                and options outstanding at July 31, 2006
            
            
            25,561,000
            
            $
            .29
            
            
            1.33
            
            $
            1,939,530Options
                granted
            
            
            16,982,542
            
            $
            .33
            
            
            -
            
            
            -Options
                exercised
            
            
            (18,633,000
            )
            
            .29
            
            
            -
            
            
            -Options
                expired
            
            
            _(1,375,000
            )
            
            .31
            
            
            -
            
            
            -Warrants
                and options outstanding at July 31, 2007
            
            
            22,535,542
            
            $
            .33
            
            
            1.48
            
            $
            2,577,734Warrants
                and options exercisable at July 31, 2007
            
            
            22,535,542
            
            $
            .33
            
            
            1.48
            
            $
            2,577,734




The
      impact on the Company’s results of operations of recording equity based
      compensation for the year ended July 31, 2007, for employees and non-employees
      was approximately $472,000 and reduced earnings per share by $0.00 per basic
      and
      diluted share.




As
      of
      July 31, 2007, there was $52,500 of unrecognized equity based compensation
      cost
      related to options granted to one executive which have not yet
      vested.




Prior
      to
      the adoption of FAS 123R, the Company applied the intrinsic value-based method
      of accounting prescribed by Accounting Principles Board (“APB”) Opinion
      No. 25, *Accounting
      for Stock Issued to Employees* ,
      and
      related interpretations including FASB Interpretation No. 44, *Accounting
      for Certain Transactions involving Stock Compensation an interpretation of
      APB
      Opinion No.*  *25* issued
      in March 2000 (“FIN 44”), to account for its fixed plan stock options.
      Under this method, compensation expense was recorded on the date of grant only
      if the current market price of the underlying stock exceeded the exercise price.
      SFAS No. 123, *Accounting
      for Stock-Based Compensation* ,
      established accounting and disclosure requirements using a fair value-based
      method of accounting for stock-based employee compensation plans. In
      December 2002, the FASB issued SFAS No. 148, *Accounting
      for Stock-Based Compensation Transition and Disclosure, an amendment of FASB
      Statement No.*  *123* .
      This
      Statement amended FASB Statement No. 123, *Accounting
      for Stock-Based Compensation* ,
      to
      provide alternative methods of transition for a voluntary change to the fair
      value method of accounting for stock-based employee compensation.




F-15




The
      following table illustrates the effect on the net loss and net loss per share
      as
      if the Company had applied the fair value recognition provisions of SFAS
      No. 123 to stock based compensation prior to February 1, 2006:




Year
                Ended
              July
                31, 2006Net
                loss
            
            $
            (4,804,692
            )Add
                stock-based employee compensation expense (recovery) included in
                reported
                net income (loss)
            
            
            -Deduct
                total stock-based employee compensation expense
              determined
                under fair value based method for all awards,
              net
                of tax
            
            
            (773,263
            )Pro
                forma net loss
            
            $
            (5,577,955
            )Pro
                forma net loss per common share (Basic and diluted)
            
            $
            (.05
            )Weighted
                average common shares outstanding:
              Basicand
                diluted
            
            
            112,204,471Net
                loss per common share basic and diluted
            
            $
            (.04
            )




Reclassifications




Certain
      items in these financial statements have been reclassified to conform to the
      current period presentation. These reclassifications had no impact on the
      Company’s results of operations, stockholders’ equity or cash
      flows.




Net
      Loss Per Common Share





Basic
      and
      diluted net loss per share is computed using the weighted average number of
      shares of common stock outstanding during the period. Equivalent common shares,
      consisting of stock options and warrants, which amounted to 25,035,542 and
      31,131,454 shares, are excluded from the calculation of diluted net loss per
      share for the fiscal year ended July 31, 2007 and 2006, respectively, since
      their effect is antidilutive.





Concentrations
      of Credit Risk





Financial
      instruments that potentially subject the Company to significant concentrations
      of credit risk consist principally of cash and cash equivalents and marketable
      securities. The Company maintains cash balances at financial institutions which
      exceed the Federal Deposit Insurance Corporation limit of $100,000 at times
      during the year.





Accounting
      for Derivatives and Hedging Activities





The
      Company entered into two identically structured derivative contracts with
      Standard Bank in March 2006. Each derivative consisted of a series of forward
      sales of gold and a purchase gold cap. The Company agreed to sell a total volume
      of 121,927 ounces of gold forward to Standard Bank at a price of $500 per ounce
      on a quarterly basis during the period from March 2007 to September 2010. The
      Company also agreed to a purchase gold cap on a quarterly basis during this
      same
      period and at identical volumes covering a total volume of 121,927 ounces of
      gold at a price of $535 per ounce. Although these contracts are not designated
      as hedging derivatives, they serve an economic purpose of protecting the company
      from the effects of a decline in gold prices. Because they are not designated
      as
      hedges, however, special hedge accounting does not apply. Derivative results
      are
      simply marked to market through earnings, with these effects recorded in *other
      income* or *other
      expense* ,
      as
      appropriate under FASB Statement No. 133, “Accounting for Derivative Instruments
      and Hedging Activities” (“FAS 133”).




F-16





The
      Company entered into interest rate swap agreements in accordance with the terms
      of its credit facility, which requires that the Company hedge at least 50
      percent of the Company’s outstanding debt under this facility. The agreements
      entered into cover $9,375,000 or 75% of the outstanding debt. Both swaps covered
      this same notional amount of $9,375,000, but over different time horizons.
      The
      first covered the six months commencing October 11, 2006 and terminated on
      March
      31, 2007 and the second covering the period from March 30, 2007 with a
      termination date of December 31, 2010. The interest rate swap agreements
      are accounted for as cash flow hedges, whereby “effective” hedge gains or losses
      are initially recorded in other comprehensive income and later reclassified
      to
      the interest expense component of earnings coincidently with the earnings impact
      of the interest expenses being hedged. “Ineffective” hedge results are
      immediately recorded in earnings also under interest expense. No component
      of
      hedge results will be excluded from the assessment of hedge effectiveness.





Use
      of
      Estimates





The
      preparation of financial statements in conformity with U.S. generally accepted
      accounting principles requires management to make estimates and assumptions
      that
      affect the reported amounts of assets and liabilities and the disclosures of
      contingent assets and liabilities at the date of the financial statements and
      the reported amounts of revenues and expenses during the reporting period.
      Actual results could differ from these estimates.





Recently
      Issued Accounting Pronouncements




The
      Company adopted the provisions of FASB Interpretation No. 48, "Accounting for
      Uncertainty in Income Taxes" ("FIN 48") effective January 1, 2007. The purpose
      of FIN 48 is to clarify and set forth consistent rules for accounting for
      uncertain tax positions in accordance with Statement of Financial Accounting
      Standards No. 109, "Accounting for Income Taxes". The cumulative effect of
      applying the provisions of this interpretation are required to be reported
      separately as an adjustment to the opening balance of retained earnings in
      the
      year of adoption. The adoption of this standard did not have an impact on the
      financial condition or the results of the Company’s operations.




On
      February 15, 2007, the FASB issued FASB Statement No. 159, The Fair Value Option
      for Financial Assets and Financial Liabilities - Including an Amendment of
      FASB
      Statement No. 115. This standard permits an entity to choose to measure many
      financial instruments and certain other items at fair value. This option is
      available to all entities. Most of the provisions in Statement 159 are elective;
      however, the amendment to FASB Statement No. 115, Accounting for Certain
      Investments in Debt and Equity Securities, applies to all entities with
      available-for-sale and trading securities. Some requirements apply differently
      to entities that do not report net income. The FASB's stated objective in
      issuing this standard is as follows: "to improve financial reporting by
      providing entities with the opportunity to mitigate volatility in reported
      earnings caused by measuring related assets and liabilities differently without
      having to apply complex hedge accounting provisions".




The
      fair
      value option established by Statement 159 permits all entities to choose to
      measure eligible items at fair value at specified election dates. A business
      entity will report unrealized gains and losses on items for which the fair
      value
      option has been elected in earnings (or another performance indicator if the
      business entity does not report earnings) at each subsequent reporting date.
      The
      fair value option: (a) may be applied instrument by instrument, with a few
      exceptions, such as investments otherwise accounted for by the equity method;
      (b) is irrevocable (unless a new election date occurs); and (c) is applied
      only
      to entire instruments and not to portions of instruments.




F-17




Statement
      159 is effective as of the beginning of an entity's first fiscal year that
      begins after November 15, 2007. The
      impact of this statement has not been determined.




NOTE
      3 -
      Marketable Securities





Marketable
      securities are classified as current assets and are summarized as
      follows:





July
                31,
              2007Marketable
                equity securities, at cost
            
            $
            50,000Marketable
                equity securities, at fair value
              (See
                Notes 12 & 16)
            
            $
            90,000




NOTE
      4 -
      Material and Supplies Inventories




July
                31,
              2007Materials,
                supplies and other
            
            $
            174,164Total
            
            $
            174,164




NOTE
      5 -
      Stockpiles, Ore on Leach Pads and Inventories (“In-Process
      Inventory”)




July
                31,
              2007Current:Stockpiles
                & Ore on leach pads
            
            $
            2,996,459Total
            
            $
            2,996,459




Costs
      that are incurred in or benefit the productive process are accumulated as
      stockpiles, ore on leach pads and inventories. Stockpiles, ore on leach pads
      and
      inventories are carried at the lower of average cost or net realizable value.
      Net realizable value represents the estimated future sales price of the product
      based on current and long-term metals prices, less the estimated costs to
      complete production and bring the product to sale. Write-downs of stockpiles,
      ore on leach pads and inventories, resulting from net realizable value
      impairments, will be reported as a component of *Costs
      applicable to sales* .
      The
      current portion of stockpiles, ore on leach pads and inventories is determined
      based on the expected amounts to be processed within the next 12 months.
      Stockpiles, ore on leach pads and inventories not expected to be processed
      within the next 12 months will be classified as long-term.





NOTE
      6 -
      Deposits





Deposits
      are classified as current assets and represent payments made on mining equipment
      and contract for the Company’s El Chanate Project in Sonora, Mexico. Deposits
      are summarized as follows:





July
                31,
              2007Advance
                payment on Mining Contract to Sinergia (Note 19)
            
            $
            683,421Equipment
                deposit
            
            
            193,000Other
            
            
            2,273Total
                Deposits
            
            $
            878,694




F-18




NOTE
      7 -
      Other Current Assets





Other
      current assets consist of the following as of July 31, 2007:





Value
                added tax to be refunded
            
            $
            1,474,759Asset
                held for resale
            
            
            166,232Other
            
            
            34,245Total
                Other Current Assets
            
            $
            1,675,236




NOTE
      8 -
      Property and Equipment





Property
      and Equipment consist of the following as of July 31, 2007:





Process
                equipment and facilities
            
            $
            16,284,643Asset
                retirement obligation
            
            
            1,218,314Mining
                equipment
            
            
            863,485Mineral properties
            
            
            141,242Computer
                and office equipment
            
            
            212,057Improvements
            
            
            15,797Furniture
            
            
            22,488Total
            
            
            18,758,026Less:
                accumulated depreciation
            
            
            (757,741
            )Property
                and equipment, net
            
            $
            18,000,285





Depreciation
      expense for the year ended July 31, 2007 and 2006 was $720,186 and $33,838,
      respectively.





NOTE
      9 -
      Intangible Assets





Intangible
      assets consist of the following as of July 31, 2007:





Repurchase
                of Net Profits Interest from FG
            
            $
            500,000Mobilization
                Payment to Mineral Contractor
            
            
            70,000Investment
                in Right of Way
            
            
            18,000Total
            
            
            588,000Less:
                accumulated amortization of Right of Way and Mobilization
                Payments
            
            
            (11,133
            )Intangible
                assets, net
            
            $
            576,867




F-19




On
      September 13, 2006, the Company repurchased the 5% net profits interest formerly
      held by Grupo Minera FG (“FG”), and subsequently acquired by Daniel Gutierrez
      Cibrian, with respect to the operations at the El Chanate mine. That net profits
      interest had originally been granted to FG in connection with the April 2004
      termination of the joint venture agreement between FG and Minera Santa Rita
      S.
      de R.L. de C.V. (“MSR”), the Company’s wholly owned Mexican subsidiary. FG also
      received a right of first refusal to carry out the works and render construction
      services required to effectuate the El Chanate Project. This right of first
      refusal is not applicable where a funding source for the project determines
      that
      others should render such works or services. FG has assigned or otherwise
      transferred to MSR all permits, licenses, consents and authorizations
      (collectively, “authorizations”) for which FG had obtained in its name in
      connection with the development of the El Chanate Project to the extent that
      the
      authorizations are assignable. To the extent that the authorizations are not
      assignable or otherwise transferable, FG has given its consent for the
      authorizations to be cancelled so that they can be re-issued or re-granted
      in
      MSR’s name. The foregoing has been completed. The purchase price for the buyback
      of the net profits interest was $500,000, and was structured as part of the
      project costs financed by the loan agreement with Standard Bank, Plc. (See
      Note
      18). Mr. Cibrian retained a 1% net profits interest in MSR, payable only after
      a
      total US $20 million in net profits has been generated from operations at El
      Chanate. The Company recorded this transaction on its balance sheet as an
      intangible asset under guidance provided by FAS 142 - *Goodwill
      and Other Intangible Assets* to be
      amortized over the period of which the asset is expected to contribute directly
      or indirectly to the Company’s cash flow. On March 23, 2007, The Company
      reacquired the remaining 1% net profits interest (see Note 19).





The
      Right
      of Way and the Mobilization Payment were recorded at cost and are being
      amortized using the units of production method. Amortization expense for the
      year ended July 31, 2007 and 2006 was $7,002 and $4,131, respectively.




NOTE
      10 -
      Mining Reclamation Bonds





These
      represent certificates of deposit that have been deposited as security for
      Mining Reclamation Bonds in Colorado. They bear interest at rates varying from
      4.35% to 5.01% annually and mature at various dates through 2010.





NOTE
      11 -
      Mining Concessions





Mining
      concessions consists of the following as of July 31, 2007:





El
                Chanate
            
            $
            44,780El
                Charro
            
            
            25,324Total
            
            
            70,104Less:
                accumulated amortization
            
            
            (
                2,663
            )Total
            
            $
            67,441





The
      El
      Chanate concessions are carried at historical cost and are being amortized
      using
      the units of production method. They were acquired in connection with the
      purchase of the stock of Minera Chanate (see Note 1). Amortization expense
      for
      the year ended July 31, 2007 and 2006 was $2,663 and $0, respectively.




MSR
      acquired an additional mining concession - El Charro. El Charro lies within
      the
      current El Chanate property boundaries. MSR is required to pay 1 1/2% net
      smelter royalty in connection with the El Charro concession.





F-20




NOTE
      12 -
      Loans Receivable - Affiliate





Loans
      receivable - affiliate consist of expense reimbursements due from a
      publicly-owned corporation in which the Company has an investment. The Company's
      president and chairman of the board of directors is an officer and director
      of
      that corporation. These loans are non-interest bearing and due on demand (see
      Note 3 & 16).





NOTE
      13 -
      Other Investments





Other
      investments are carried at cost and consist of tax liens purchased on properties
      located in Lake County, Colorado.




NOTE
      14 -
      Reclamations and Remediation Liabilities (“Asset Retirement
      Obligations”)




Reclamation
      costs are allocated to expense over the life of the related assets and are
      periodically adjusted to reflect changes in the estimated present value
      resulting from the passage of time and revisions to the estimates of either the
      timing or amount of the reclamation and abandonment costs. The Asset Retirement
      Obligation is based on when the spending for an existing environmental
      disturbance and activity to date will occur. The Company reviews, on an annual
      basis, unless otherwise deemed necessary, the Asset Retirement Obligation at
      each mine site. As of July 31, 2007, approximately $1,249,000 was accrued for
      reclamation obligations relating to mineral properties in accordance with SFAS
      No. 143, “Accounting for Asset Retirement Obligations.”




The
      following is a reconciliation of the liability for long-term Asset Retirement
      Obligations for the year ended July 31, 2007:




Balance
                at beginning of period
            
            $
            -Additions,
                changes in estimates and other
            
            
            1,218,315Liabilities
                settled
            
            
            -Accretion
                expense
            
            
            30,788Balance
                at end of period
            
            $
            1,249,103




NOTE
      15 -
      Other Comprehensive Income (Loss)-Supplemental Non-Cash Investing
      Activities





Other
      comprehensive income (loss) consists of accumulated foreign translation gains
      and losses and unrealized gains and losses on marketable securities and is
      summarized as follows:





Balance
                - July 31, 2005
            
            $
            157,714Equity
                Adjustments from Foreign Currency Translation
            
            
            48,779Unrealized
                Gains (loss) on Marketable Securities
            
            
            (60,000
            )Balance
                - July 31, 2006
            
            
            146,493Change
                in fair value of derivative instrument
            
            
            (47,343
            )Equity
                Adjustments from Foreign Currency Translation
            
            
            204,993Unrealized
                Gains (loss) on Marketable Securities
            
            
            -Balance
                - July 31, 2007
            
            $
            304,143





F-21




NOTE
      16 -
      Related Party Transactions





In
      August
      2002, the Company purchased marketable equity securities of a related company.
      The Company recorded approximately $9,000 and $10,350 in expense reimbursements
      including office rent from this entity for the year ended July 31, 2007 and
      2006, respectively (see Notes 3 and 12).





The
      Company utilizes a Mexican Corporation 100% owned by two officers/Directors
      and
      stockholders of the Company for mining support services. These services include
      but are not limited to the payment of mining salaries and related costs. The
      Mexican Corporation bills the Company for these services at cost. Mining
      expenses charged by the Mexican Corporation and eliminated upon consolidation
      amounted to approximately $702,000 and $122,000 for the year ended July 31,
      2007
      and 2006, respectively.





During
      the years ended July 31, 2007 and 2006, the Company paid its V.P. Development
      and Director $0 and $68,500, respectively, for professional geologist and
      management services rendered to the Company. This individual also earned wages
      of $120,000 and $50,000 during the years ended July 31, 2007 and 2006
      respectively. During the years ended July 31, 2007 and 2006, the Company paid
      its V.P. Exploration and Director consulting fees of $0 and $88,500,
      respectively. In addition, this individual earned wages of $120,000 during
      the
      year ended July 31, 2007. During the year ended July 31, 2007 and 2006, the
      Company paid a director legal and consulting fees of $24,000 and $8,000,
      respectively. ****





The
      Company’s V.P. Development and Director has, since 1995, been a senior
      consultant in the Minerals Advisory Group LLC, Tucson, Arizona, an entity that
      provided $3,000 of services to the Company for the year ended July 31, 2006.





In
      January 2006, the Company extended the following stock options through January
      3, 2007, all of which are exercisable at $0.05 per share: Chief Executive
      Officer and Director - 1,250,000 shares; Director - 500,000 shares; V.P.
      Investor Relations and Director - 327,727 shares; V.P. Development and Director
      - 500,000 shares; and V.P. Mine Development - 25,000 shares. There
      was
      not a material increase in the intrinsic value of these options at the date
      of
      modification as compared to the intrinsic value of the original issuance of
      these stock options on the applicable measurement date. All of these options
      were exercised prior to their extended expiration.





On
      February 7, 2007, Robert Roningen resigned as the Company’s Secretary and, on
      February 9, 2007, John Brownlie, the Company’s Vice President of Operations, was
      appointed Chief Operating Officer and Jeffrey W. Pritchard, the Company’s Vice
      President of Investor Relations, was appointed Secretary. Mr. Brownlie’s
      appointment as the Company’s Chief Operating Officer did not result in any
      changes to his compensation arrangement under his employment agreement with
      the
      Company (see Note 23 for subsequent events).





NOTE
      17 -
      Stockholders' Equity





Common
      Stock





At
      various stages in the Company’s development, shares of the Company’s common
      stock have been issued at fair market value in exchange for services or property
      received with a corresponding charge to operations, property and equipment
      or
      additional paid-in capital depending on the nature of the services provided
      or
      property received.





The
      Company issued 1,150,000 shares of common stock and 12,600,000 common stock
      purchase warrants to Standard Bank as part of a commitment fee to entering
      into
      the credit facility on August 15, 2006, with its wholly-owned subsidiaries
      MSR
      and Oro. The Company recorded the issuance of the 1,150,000 shares of common
      stock and 12,600,000 warrants as deferred financing costs of approximately
      $351,000 and $3,314,000, respectively, as a reduction of stockholders' equity
      on
      the Company's balance sheet. The issuance of 1,150,000 shares was recorded
      at
      the fair market value of the Company's common stock at the closing date or
      $0.305 per share. The warrants were valued at approximately $3,314,000 using
      the
      Black-Scholes option pricing model and were reflected as deferred financing
      costs as a reduction of stockholders' equity on the Company’s balance sheet (See
      Note 18). The balance of deferred financing costs, net of amortization, as
      of
      July 31, 2007, as a reduction of stockholders' equity, was approximately
      $3,438,058. Amortization expense for the year ended July 31, 2007, was
      approximately $750,000.




F-22





The
      Company closed two private placements in January 2007 pursuant to which it
      issued an aggregate of 12,561,667 units, each unit consisting of one share
      of
      its common stock and a warrant to purchase 1⁄4 of a share of its common stock at
      $0.30 per unit for proceeds of approximately $3,486,000, net of
      commissions of approximately $283,000. The Warrant issued to each purchaser
      in
      the January 2007 placements is exercisable for one share of common stock, at
      an
      exercise price equal to $0.40 per share. Each Warrant has a term of eighteen
      months and is fully exercisable from the date of issuance. The Company issued
      to
      the placement agents eighteen month warrants to purchase up to an aggregate
      of
      942,125 shares of common stock at an exercise price of $0.30 per share. Such
      placement agent warrants are valued at approximately $142,000 using the
      Black-Scholes option pricing method.





The
      Company also received proceeds of approximately $5,643,000 during the year
      ended
      July 31, 2007, from the exercising of an aggregate of 22,203,909 of warrants
      issued in past private placements.





On
      March
      22, 2007, the Company issued 500,000 shares of common stock to John Brownlie,
      the Company’s Chief Operating Officer under the Company’s 2006 Equity Incentive
      Plan. The fair value of the services provided in March 2007 amounted to $225,000
      or $0.45 per share.





In
      March
      2007, the Company issued 65,625 shares of common stock to an independent
      contractor for services provided related to the Company’s El Chanate project.
      The fair value of the services provided amounted to $26,250 or $0.40 per share.
      In April 2007, this independent contractor was engaged as the general manager
      of
      the Company’s El Chanate project for a six month term with an option for an
      additional six month term, if mutually agreed upon by both parties. Pursuant
      to
      the agreement, the Company issued 113,636 shares of common stock with a fair
      value of $50,000 or $0.44 per share at the fair market value of the Company’s
      common stock on the date of the agreement. The issuance of these shares vest
      over the six-month term. The independent contractor and the Company mutually
      agreed to terminate the contractor after three months as construction was
      complete. The Company issued 56,818 shares of the Company’s common stock on the
      vested portion of the 113,636 shares or 50%.





Recapitalization





The
      Board
      of Directors recommended an amendment to the Company's Certificate of
      Incorporation to increase the Company's authorized shares of capital stock
      from
      200,000,000 to 250,000,000 shares. This amendment was approved by the
      stockholders on February 21, 2007 and the Company affected the authorized share
      increase on February 26, 2007.





Warrants
      and Options





On
      November 30, 2006, the Company’s board of directors granted 100,000 common stock
      options to each of John Postle, Ian A. Shaw and Mark T. Nesbitt, the Company’s
      independent directors. The options are to purchase shares of the Company’s
      common stock at an exercise price of $0.33 per share (the closing price of
      its
      common stock on that date) for a period of two years. The Company utilized
      the
      Black-Scholes method to fair value the 300,000 options received by the directors
      and recorded approximately $40,000 as equity based compensation
      expense.




F-23





On
      December 13, 2006, the Company issued two year options to purchase the Company’s
      common stock at an exercise price of $0.36 per share to its Chief Operating
      Officer, Chief Financial Officer and the Company’s Canadian counsel. These
      options are for the purchase of 250,000 shares, 100,000 shares and 100,000
      shares, respectively.  The
      Company utilized the Black-Scholes method to fair value the 450,000 options
      received by these individuals and recorded approximately $61,000 as stock based
      compensation expense.





On
      March
      22, 2007, the Company issued two year options to purchase the Company’s common
      stock at an exercise price of $0.45 per share to the Company’s SEC Counsel.
      These options are for the purchase of 100,000 shares and were issued under
      the
      2006 Equity-Incentive Plan. The Company utilized the Black-Scholes Method to
      fair value these options and recorded approximately $15,000 as equity based
      compensation expense.





On
      June
      13, 2007, the Company issued two year options to purchase the Company’s common
      stock at an exercise price of $0.384 per share to the Company’s CFO. These
      options are for the purchase of 500,000 shares and were issued under the 2006
      Equity-Incentive Plan. The Company utilized the Black-Scholes Method to fair
      value these options and recorded approximately $65,000 as equity based
      compensation expense.





Warrant
      Re-pricing





In
      December 2005, the Board of Directors ratified the temporary re-pricing of
      certain warrants that were issued in connection with the February 2005 private
      placement from $0.30 per share to $0.20 per share exercise price. In addition,
      warrants issued to the placement agent were also re-priced from $0.25 per share
      to $0.20 per share exercise price. These re-pricings were in effect for the
      period November 28, 2005 through January 31, 2006. All of these warrants were
      either exercised or expired within the term limit.





2006
      Equity Incentive Plan





The
      2006
      Equity Incentive Plan (the “Plan”), approved by stockholders on February 21,
      2007, is intended to attract and retain individuals of experience and ability,
      to provide incentive to the Company’s employees, consultants, and non-employee
      directors, to encourage employee and director proprietary interests in the
      Company, and to encourage employees to remain in the Company’s employ.





The
      Plan
      authorizes the grant of non-qualified and incentive stock options, stock
      appreciation rights and restricted stock awards (each, an “Award”). A maximum of
      10,000,000 shares of common stock are reserved for potential issuance pursuant
      to Awards under the Plan. Unless sooner terminated, the Plan will continue
      in
      effect for a period of 10 years from its effective date.





The
      Plan
      is administered by the Company’s Board of Directors which has delegated the
      administration to the Company’s Compensation Committee. The Plan provides for
      Awards to be made to such of the Company’s employees, directors and consultants
      and its affiliates as the Board may select. As
      of
      July 31, 2007, 1,550,000 options and shares have been granted under the
      Plan .





Stock
      options awarded under the Plan may vest and be exercisable at such times (not
      later than 10 years after the date of grant) and at such exercise prices (not
      less than Fair Market Value at the date of grant) as the Board may determine.
      Unless otherwise determined by the Board, stock options shall not be
      transferable except by will or by the laws of descent and distribution. The
      Board may provide for options to become immediately exercisable upon a "change
      in control," as defined in the Plan.




F-24





The
      exercise price of an option must be paid in cash. No options may be granted
      under the Plan after the tenth anniversary of its effective date. Unless the
      Board determines otherwise, there are certain continuous service requirements
      and the options are not transferable.





The
      Plan
      provides the Board with the general power to amend the Plan, or any portion
      thereof at any time in any respect without the approval of the Company’s
      stockholders, provided
      however, that the stockholders must approve any amendment which increases the
      fixed maximum percentage of shares of common stock issuable pursuant to the
      Plan, reduces the exercise price of an Award held by a director, officer or ten percent stockholder or
      extends the term of an Award held by a director, officer or ten percent stockholder. Notwithstanding the foregoing,
      stockholder approval may still be necessary to satisfy the requirements of
      Section 422 of the Code, Rule 16b-3 of the Securities Exchange Act of 1934,
      as
      amended or any applicable stock exchange listing requirements. The Board may
      amend the Plan in any respect it deems necessary or advisable to provide
      eligible Employees with the maximum benefits provided or to be provided under
      the provisions of the Code and the regulations promulgated thereunder relating
      to Incentive Stock Options and/or to bring the Plan and/or Incentive Stock
      Options granted under it into compliance therewith. Rights under any Award
      granted before amendment of the Plan cannot be impaired by any amendment of
      the
      Plan unless the Participant consents in writing. The Board is empowered to
      amend
      the terms of any one or more Awards; provided, however, that the rights under
      any Award shall not be impaired by any such amendment unless the applicable
      Participant consents in writing and further provided that the Board cannot
      amend
      the exercise price of an option, the Fair Market Value of an Award or extend
      the
      term of an option or Award without obtaining the approval of the stockholders
      if
      required by the rules of the TSX or any stock exchange upon which the common
      stock is listed.





NOTE
      18 -
      Project Finance Facility





On
      August
      15, 2006, the Company entered into a credit facility (the “Credit Facility”)
      involving its wholly-owned subsidiaries MSR and Oro, as borrowers, us, as
      guarantor, and Standard Bank plc (“Standard Bank”), as the lender and the
      offshore account holder. Under the Credit Facility, MSR and Oro have agreed
      to
      borrow money in an aggregate principal amount of up to US$12.5 million (the
      “Loan”) for the purpose of constructing, developing and operating the Company’s
      El Chanate Project (the “Mine”). The Company is guaranteeing the repayment of
      the loan and the performance of the obligations under the Credit Facility.
      The
      Loan is scheduled to be repaid in fourteen quarterly payments with the first
      principal payment due after certain Mine start-up production and performance
      criteria are satisfied, which the Company believes will occur in the first
      calendar quarter of 2008. The Loan bears interest at LIBOR plus 4.00%, with
      LIBOR interest periods of 1, 2, 3 or 6 months and with interest payable at
      the
      end of the applicable interest period. As of July 31, 2007, the outstanding
      amount on the credit facility was $12,500,000 and accrued interest on this
      facility was approximately $100,000.




The
      Credit Facility contains covenants customary for a project financing loan,
      including but not limited to restrictions (subject to certain exceptions) on
      incurring additional debt, creating liens on its property, disposing of any
      assets, merging with other companies and making any investments. The Company
      will be required to meet and maintain certain financial covenants, including
      (i)
      a debt service coverage ratio of not less than 1.2 to 1.0, (ii) a projected
      debt
      service coverage ratio of not less than 1.2 to 1.0, (iii) a loan life coverage
      ratio of at least 1.6 to 1.0, (iv) a project life coverage ratio of at least
      2.0
      to 1.0 and (v) a minimum reserve tail. The Company also is required to maintain
      a certain minimum level of unrestricted cash, and upon meeting certain Mine
      start-up production and performance criteria, MSR and Oro are required to
      maintain a specified amount of cash as a reserve for debt
      repayment.




F-25





The
      Loan
      is secured by all of the tangible and intangible assets and property owned
      by
      MSR and Oro pursuant to the terms of a Mortgage Agreement, a Non-Possessory
      Pledge Agreement, an Account Pledge Agreement and certain other agreements
      entered into in Mexico (the “Mexican Collateral Documents”). As additional
      collateral for the Loan, the Company, together with its subsidiary, Leadville
      Mining & Milling Holding Corporation, have pledged all of its ownership
      interest in MSR and Oro. In addition to these collateral arrangements, MSR
      and
      Oro are required to deposit all proceeds of the Loan and all cash proceeds
      received from operations and other sources in an offshore, controlled account
      with Standard Bank. Absent a default under the loan documents, MSR and Oro
      may
      use the funds from this account for specific purposes such as approved project
      costs and operating costs.





As
      part
      of the fee for entering into and closing the Credit Facility, the Company issued
      to Standard Bank 1,150,000 shares of its restricted common stock and a warrant
      for the purchase of 12,600,000 shares of its common stock at an exercise price
      of $0.317 per share, expiring on the earlier of (a) December 31, 2010 or (b)
      the
      date one year after the repayment of the Credit Facility. Previously, pursuant
      to the mandate and commitment letter for the facility, the Company issued to
      Standard Bank 1,000,000 shares of its restricted common stock and a warrant
      for
      the purchase of 1,000,000 shares of its common stock at an exercise price of
      $0.32 per share, expiring on the earlier of (a) December 31, 2010 or (b) the
      date one year after the repayment of the Credit Facility. The Company recorded
      the issuance of the 1,000,000 shares of common stock as deferred financing
      costs
      of approximately $270,000 as a reduction of stockholders' equity on its balance
      sheet. The issuance of these shares was recorded at the fair market value of
      the
      Company’s common stock at the commitment letter date or $0.27 per share. In
      addition, the warrants were valued at approximately $253,000 using the
      Black-Scholes option pricing model and were reflected as deferred financing
      costs as a reduction of stockholders' equity on the Company’s balance sheet in
      2006. The Company registered for public resale the 2,150,000 shares issued
      to
      Standard Bank and the 13,600,000 shares issuable upon exercise of warrants
      issued to Standard Bank. ****





In
      March
      2006, The Company entered into a gold price protection arrangement to protect
      it
      against future fluctuations in the price of gold and interest rate swap
      agreements in October 2006 in accordance with the terms of the Credit Facility
      both with Standard Bank (See Note 21 for more details on these transactions).





NOTE
      19 -
      Mining, Engineering and Supply Contracts





In
      early
      December 2005, the Company’s wholly-owned Mexican subsidiary, MSR, which holds
      the rights to develop and mine El Chanate Project, entered into a Mining
      Contract with a Mexican mining contractor, Sinergia Obras Civiles y Mineras,
      S.A. de C.V,("Sinergia"). The Mining Contract becomes effective if and when
      MSR
      sends the Contractor a formal "Notice of Award".





On
      August
      2, 2006, the Company amended the November 24, 2005 Mining Contract between
      its
      subsidiary, MSR, and Sinergia. Pursuant to the amendment, MSR's right to deliver
      the Notice to Proceed to Sinergia was extended to November 1, 2006. Provided
      that this Notice was delivered to Sinergia on or before that date, with a
      specified date of commencement of the Work (as defined in the contract) not
      later than February 1, 2007, the mining rates set forth in the Mining Contract
      would still apply; subject to adjustment for the rate of inflation between
      September 23, 2005 and the date of commencement of the work. As
      consideration for these changes, the Company paid Sinergia $200,000 of the
      requisite advance payment discussed below. On November 1, 2006, MSR delivered
      the Notice of Award specifying January 25, 2007, as the date of commencement
      of
      Work. Based
      on
      a revised crushing and stacking plan and since MSR is placing the leach pad
      overliner material both Sinergia and MSR mutually agreed to delay mining until
      the end of March 2007. Mining of the El Chanate Project initiated on March
      25,
      2007.





Pursuant
      to the Mining Contract, Sinergia, using its own equipment, generally is
      performing all of the mining work (other than crushing) at the El Chanate
      Project for the life of the mine. MSR delivered to the Contractor a mobilization
      payment of $70,000 and the advance payment of $520,000. The advance payments
      are
      recoverable by MSR out of 100% of subsequent payments due to Sinergia under
      the
      Mining Contract. Pursuant to the Mining Contract, upon termination, Sinergia
      would be obligated to repay any portion of the advance payment that had not
      yet
      been recouped. Sinergia’s mining rates are subject to escalation on an annual
      basis. This escalation is tied to the percentage escalation in Sinergia’s costs
      for various parts for its equipment, interest rates and labor. One of the
      principals of Sinergia is one of the former principals of FG. FG was the
      Company’s former joint venture partner.




F-26





On
      March
      23, 2007, The Company reacquired the remaining 1% net profits interest in its
      Mexican affiliate, MSR from one of the successors to FG (“FG’s Successor”). When
      the joint venture was terminated in March 2004, FG received, among other things,
      a participation certificate entitling it to receive 5% of the annual dividends
      of MSR, when declared. The participation certificate also gave FG the right
      to
      participate, but not to vote, in the meetings of MSR’s Board of Managers,
      Technical Committee and Partners. In August 2006, the Company repurchased the
      participation certificate from FG’s Successor for $500,000 with FG’s Successor
      retaining a 1% net profits interest in MSR, payable only after a total $20
      million in net profits has been generated from operations at El Chanate. The
      Company reacquired the remaining 1% net profits interest in consideration of
      its
      advancing $319,000 to Sinergia under the Mining Contract. FG’s Successor is a
      principal of Sinergia.





In
      June
      2006, the Company's Mexican operating subsidiary retained the contracting
      services of Mexican subsidiary of M3 Engineering & Technology Corporation
      ("M3M") to provide EPCM (engineering procurement construction management)
      services. M3M supervised the construction and integration of the various
      components necessary to commence production at the El Chanate Project. The
      contracted services are not to exceed $1,200,000 and the contract is based
      on
      the EPCM services to be provided by M3M. This contract was completed as of
      July
      31, 2007, and services provided pursuant to this contract by the contractor
      through this date amounted to approximately $1,026,000 pursuant to this
      contract.





On
      March
      2, 2007, MSR entered into a sales contract with Degussa Mexico S.A. de C.V.
      to
      supply sodium cyanide solid bricks for use in the heap leach process with the
      El
      Chanate Project. The contract period initiates April 1, 2007 and extends through
      March 31, 2010 and estimates total yearly requirements at 1,000 metric tons
      plus
      or minus 20%. The total minimum annual commitment associated with this contract
      is anticipated to be between $1,500,000 in year one and two and $1,600,000
      in
      year three.





NOTE
      20 -
      Employee and Consulting Agreements





The
      Company entered into employment agreements, effective July 31, 2006, with the
      following executive officers: Gifford A. Dieterle, President and Treasurer,
      Roger A. Newell, Vice President of Development, Jack V. Everett, Vice President
      of Exploration, and Jeffrey W. Pritchard, Vice President of Investor Relations.
      On December 5, 2006, effective January 1, 2007, The Company entered into an
      employment agreement with J. Scott Hazlitt, Vice President of Mine
      Development.





The
      agreements run for a period of three years and automatically renew for
      successive one-year periods unless the Company or the executive provides the
      other party with written notice of their intent not to renew at least 30 days
      prior to the expiration of the then current employment period.





Mr.
      Dieterle is entitled to a base annual salary of at least $180,000, Mr. Hazlitt
      is entitled to a base annual salary of at least $125,000 and each of the other
      executives is entitled to a base annual salary of at least $120,000. Each
      executive is entitled to a bonus or salary increase in the sole discretion
      of
      the board of directors. In addition, Messrs. Dieterle, Newell, Everett and
      Pritchard each received two year options to purchase an aggregate of 250,000
      shares of the Company’s common stock at an exercise price of $0.32 per share
      (the closing price on July 31, 2006).




F-27





The
      Company has the right to terminate any executive’s employment for cause or on 30
      days’ prior written notice without cause or in the event of the executive’s
      disability (as defined in the agreements). The agreements automatically
      terminate upon an executive’s death. “Cause” is defined in the agreements as (1)
      a failure or refusal to perform the services required under the agreement;
      (2) a
      material breach by executive of any of the terms of the agreement; or (3)
      executive’s conviction of a crime that either results in imprisonment or
      involves embezzlement, dishonesty, or activities injurious to the Company’s
      reputation. In the event that the Company terminates an executive’s employment
      without cause or due to the disability of the executive, the executive will
      be
      entitled to a lump sum severance payment equal to one month’s salary, in the
      case of termination for disability, and up to 12 month’s salary (depending upon
      years of service), in the case of termination without cause.





Each
      executive has the right to terminate his employment agreement on 60 days’ prior
      written notice or, in the event of a material breach by the Company of any
      of
      the terms of the agreement, upon 30 days’ prior written notice. In the event of
      a claim of material breach by the Company of the agreement, the executive must
      specify the breach and its failure to either (i) cure or diligently commence
      to
      cure the breach within the 30 day notice period, or (ii) dispute in good faith
      the existence of the material breach. In the event that an agreement terminates
      due to the Company’s breach, the executive is entitled to severance payments in
      equal monthly installments beginning
      in the month following the executive’s termination equal to three month’ salary
      plus one additional month’s salary for each year of service to the Company.
      Severance payments cannot exceed 12
      month’s salary.





In
      conjunction with the employment agreements, the Company’s board of directors
      deeming it essential to the best interests of its stockholders to foster the
      continuous engagement of key management personnel and recognizing that, as
      is
      the case with many publicly held corporations, a change of control might occur
      and that such possibility, and the uncertainty and questions which it might
      raise among management, might result in the departure or distraction of
      management personnel to the detriment of the company and its stockholders,
      determined to reinforce and encourage the continued attention and dedication
      of
      members of the Company’s management to their engagement without distraction in
      the face of potentially disturbing circumstances arising from the possibility
      of
      a change in control of the company, it entered into identical agreements
      regarding change in control with the executives. Each of the agreements
      regarding change in control continues through December 31, 2009 (December 31,
      2010 for Mr. Hazlitt) and extends automatically to the third anniversary thereof
      unless the Company gives notice to the executive prior to the date of such
      extension that the agreement term will not be extended. Notwithstanding the
      foregoing, if a change in control occurs during the term of the agreements,
      the
      term of the agreements will continue through the second anniversary of the
      date
      on which the change in control occurred. Each of the agreements entitles the
      executive to change of control benefits, as defined in the agreements and
      summarized below, upon his termination of employment with the Company during
      a
      potential change in control, as defined in the agreements, or after a change
      in
      control, as defined in the agreements, when his termination is caused (1) by
      the
      Company for any reason other than permanent disability or cause, as defined
      in
      the agreement (2) by the executive for good reason as defined in the agreements
      or, (3) by the executive for any reason during the 30 day period commencing
      on
      the first date which is six months after the date of the change in control.
      Each
      executive would receive a lump sum cash payment of three times his base salary
      and outplacement benefits. Each agreement also provides that the executive
      is
      entitled to a payment to make him whole for any federal excise tax imposed
      on
      change of control or severance payments received by him.





Pursuant
      to a September 1, 2006 amended consulting agreement, Christopher Chipman is
      engaged as the Company’s Chief Financial Officer. Pursuant to the agreement, Mr.
      Chipman devotes approximately 50% of his time to the Company’s business and
      receives a monthly fee of $10,000. The agreement runs for an initial one year
      period, and is renewable thereafter for an additional year. Mr. Chipman can
      terminate the Agreement on 60 days notice. In conjunction with the amended
      consulting agreement, the Company entered into a change of control agreement
      similar to the agreements entered into with other executive officers; except
      that Mr. Chipman’s agreement renews annually and his benefits are based upon one
      times his base annual fee. In connection with the original engagement agreement
      with Mr. Chipman in March 2006, Mr. Chipman received a two year option to
      purchase an aggregate of 50,000 shares of Company common stock at an exercise
      price of $.34 per share. The option vested at the rate of 10,000 shares per
      month and are fully vested.




F-28





On
      May
      12, 2006, the Company entered into an employment agreement with John Brownlie,
      pursuant to which Mr. Brownlie originally served as Vice President Operations.
      Mr. Brownlie became our Chief Operating Officer in February 2007. Mr. Brownlie
      serves as Vice President Operations. Mr. Brownlie receives a base annual salary
      of $150,000 and is entitled to annual bonuses. Upon his employment, he received
      options to purchase an aggregate of 200,000 shares of the Company’s common stock
      at an exercise price of $.32 per share. 50,000 options vested immediately and
      the balance vest upon the Company achieving "Economic Completion" as that term
      is defined in the Standard Bank Credit Facility (when the Company has commenced
      mining operations and has been operating at anticipated capacity for 60 to
      90
      days). The term of the options is two years from the date of vesting. The
      agreement runs for an initial two year period, and automatically renews
      thereafter for additional one year periods unless terminated by either party
      within 30 days of a renewal date. The Company can terminate the agreement for
      cause or upon 30 days notice without cause. Mr. Brownlie can terminate the
      agreement upon 60 days notice without cause or, if there is a breach of the
      agreement by the Company that is not timely cured, upon 30 days notice. In
      the
      event that the Company terminates him without cause or he terminates due to
      the
      Company’s breach, he will be entitled to certain severance payments. The Company
      utilized the Black-Scholes method to fair value the 200,000 options received
      by
      Mr. Brownlie. The Company recorded approximately $70,000 as deferred
      compensation expense as of the date of the agreement and recorded the vested
      portion or $17,500 as stock based compensation expense for the year ended July
      31, 2006.





On
      June
      6, 2007, Jack V. Everett resigned as Vice President of Exploration and a
      Director of the Company and entered into a consulting agreement with the Company
      to provide mining and mineral exploration consultation services.





See
      Note
      24 - Subsequent Events for changes to executives and executive compensation
      subsequent to the fiscal year ended July 31, 2007.





NOTE
      21 -
      Sales Contracts, Commodity and Financial Instruments





In
      March
      2006, the Company entered into two identically structured derivative contracts
      with Standard Bank (See Note 13). Each derivative consisted of a series of
      forward sales of gold and a purchase gold cap. The Company agreed to sell a
      total volume of 121,927 ounces of gold forward to Standard Bank at a price
      of
      $500 per ounce on a quarterly basis during the period from March 2007 to
      September 2010. The Company also agreed to a purchase gold cap on a quarterly
      basis during this same period and at identical volumes covering a total volume
      of 121,927 ounces of gold at a price of $535 per ounce. While the period of
      the
      derivative contracts has commenced, the Company does not anticipate any material
      adverse effect from the fact that it has not commenced to sell gold because
      the
      price of gold is substantially above $535 per ounce. Under FASB Statement No.
      133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS 133"),
      these contracts must be carried on the balance sheet at their fair value, with
      changes to the fair value of these contracts reflected as Other Income or
      Expense. These contracts were not designated as hedging derivatives; and
      therefore, special hedge accounting does not apply.





The
      first
      derivative was entered into on March 1, 2006 for a premium of $550,000; and
      the
      second was entered into on March 30, 2006 for a premium of $250,000. The gold
      price rose sharply during this period March 1, 2006 through July 31, 2006 and
      was the primary reason for the decrease in premium on the derivative contracts.
      As of July 31, 2007, the carrying value of this derivative liability was
      approximately $548,000. The change in fair value on these derivative contracts
      was approximately $1,226,000 for the year ended July 31, 2007. This reduction
      in
      fair value was recorded as an other expense on the Company’s income
      statement.




F-29





On
      October 11, 2006, prior to the Company’s initial draw on the Credit Facility,
      the Company entered into interest rate swap agreements in accordance with the
      terms of the Credit Facility, which requires that the Company hedge at least
      50
      percent of the Company’s outstanding debt under this facility. The agreements
      entered into cover $9,375,000 or 75% of the outstanding debt. Both swaps covered
      this same notional amount of $9,375,000, but over different time horizons.
      The
      first covered the six months commencing October 11, 2006 and terminated on
      March
      31, 2007 and the second covering the period from March 30, 2007 with a
      termination date of December 31, 2010. The Company intends to use
      discretion in managing this risk as market conditions vary over time, allowing
      for the possibility of adjusting the degree of hedge coverage as the Company
      deems appropriate. However, any use of interest rate derivatives will be
      restricted to use for risk management purposes.




The
      Company uses variable-rate debt to finance a portion of the El Chanate Project.
      Variable-rate debt obligations expose the Company to variability in interest
      payments due to changes in interest rates. As a result of these arrangements,
      the Company will continuously monitor changes in interest rate exposures and
      evaluate hedging opportunities. The Company’s risk management policy permits it
      to use any combination of interest rate swaps, futures, options, caps and
      similar instruments, for the purpose of fixing interest rates on all or a
      portion of variable rate debt, establishing caps or maximum effective interest
      rates, or otherwise constraining interest expenses to minimize the variability
      of these effects.




The
      interest rate swap agreements are accounted for as cash flow hedges, whereby
      “effective” hedge gains or losses are initially recorded in other comprehensive
      income and later reclassified to the interest expense component of earnings
      coincidently with the earnings impact of the interest expenses being hedged.
      “Ineffective” hedge results are immediately recorded in earnings also under
      interest expense. No component of hedge results will be excluded from the
      assessment of hedge effectiveness. The amount expected to be reclassified from
      OCI to earnings during the 12 months ending July 31, 2007 from these two swaps
      was determined to be immaterial. As of July 31, 2007, the Company’s derivative
      liability associated with these swap agreements amounted to approximately
      $48,000.




The
      Company is exposed to credit losses in the event of non-performance by
      counterparties to these interest rate swap agreements, but the Company does
      not
      expect any of the counterparties to fail to meet their obligations. To manage
      credit risks, the Company selects counterparties based on credit ratings, limits
      its exposure to a single counterparty under defined guidelines, and monitor
      the
      market position with each counterparty as required by
      SFAS 133.




NOTE
      22 -
      Income Taxes





For
      income tax purposes, the Company has available net operating loss carryforwards
      ("NOL") as of July 31, 2007 of approximately $21,000,000 to reduce future
      federal taxable income. If any of the NOL's are not utilized, they will expire
      at various dates through 2026. There may be certain limitations as to the future
      annual use of the NOLs due to certain changes in the Company's
      ownership.





F-30




Income
      tax benefit attributable to net loss differed from the amounts computed by
      applying the statutory Federal Income tax rate applicable for each period as
      a
      result of the following:




Year
                Ended July 31,2007
            
            2006Computed
                "expected" tax benefit
            
            $
            8,103,638
            
            $
            5,823,176Decrease
                in tax benefit resulting from net operating loss for which no benefit
                is
                currently available
            
            $
            8,103,638
            
            $
            5,823,176




The
      Company has deferred tax assets of approximately $8,103,638 at July 31, 2007
      resulting primarily from net operating loss carryforwards. The Deferred tax
      assets have been fully offset by a valuation allowance resulting from the
      uncertainty surrounding their future realization. The difference between the
      federal statutory rate of 34% and the Company's effective tax rate of 0% is
      due
      to an increase in the valuation allowance of $2,280,462 and $1,161,556 in 2007
      and 2006, respectively.




NOTE
      23 -
      Commitments and Contingencies





Minera
      Chanate Option





Under
      the
      terms of the Minera Chanate purchase agreement, Capital Gold has granted
      AngloGold's designee to receive a one-time option to purchase 51% of Minera
      Chanate (or such entity that owns the Minera Chanate concessions at time of
      exercise) based upon the achievements of certain events (see Note
      1).





Lease
      Commitments





The
      Company occupies office space in New York City under a non-cancelable operating
      lease that commenced on September 1, 2007 and terminates on August 31, 2012.
      In
      addition to base rent, the lease calls for payment of utilities and other
      occupancy costs.





Approximate
      future minimum payments under this lease are as follows:


Fiscal
                  Years Ending July 31,2008
              
              $
              118,0002009
              
              
              128,0002010
              
              
              128,0002011
              
              
              128,0002012
              
              
              128,0002013
              
              
              11,000$
              641,000





Rent
      expense under the previous office lease in New York City was approximately
      $66,000 and $63,000 for the years ended July 31, 2007 and 2006,
      respectively.





Land
      Easement





On
      May
      25, 2005, MSR entered into an agreement for an irrevocable access easement
      and
      an irrevocable fluids (electricity, gas, water and others) easement to land
      located at Altar, Sonora, Mexico. The term of the agreement is five years,
      extendable for 1-year additional terms, upon MSR’s request. The agreement would
      be suspended only by force majeure or Acts of God; and extendable for the
      duration of the suspension. In consideration for these easements, $18,000 was
      paid upon the signing of the agreement and yearly advance payments equal to
      two
      annualized general minimum wages (365 X 2 general minimum wages) in force in
      Altar, Sonora, Mexico, are required. These yearly payments are to be made on
      September 1 of each year, using the minimum wage in effect on that day for
      the
      calculation of the amount payable. These payments are to be made for as long
      as
      the construction and production mining works and activities of MSR are being
      carried out, and are to cease as soon as such works and activities are
      permanently stopped.




F-31




El
      Charro





In
      May
      2005, the Company acquired rights to the El Charro concession for approximately
      $20,000 and a royalty of 1.5% of net smelter return. The Company acquired the
      El
      Charro concession because it is surrounded entirely by the Company’s other
      concessions. ****





NOTE
      24 -
      Subsequent Events





On
      August
      29, 2007, the Board increased the salaries of the Company’s executive officers
      to be commensurate with industry standards. The new salaries are as follows:
      Gifford A. Dieterle, President, Treasurer and Chairman of the Board,
      $250,000; John Brownlie, Chief Operating Officer, $225,000; Christopher Chipman,
      Chief Financial Officer, $175,000 (consulting fee); Jeffrey W. Pritchard, Vice
      President - Investor Relations and Secretary, $195,000; Roger A. Newell, Vice
      President - Development, $135,000; and J. Scott Hazlitt, Vice President - Mine
      Development, $135,000. The salary increase for Mr. Brownlie and the consulting
      fee increase for Mr. Chipman are retroactive to May 1, 2007 and the salary
      increase for Mr. Pritchard is retroactive to August 1, 2007. The Board also
      increased directors’ compensation to the Company’s independent directors and to
      Robert Roningen by $1,000 per month.





In
      May
      2007, the Company completed an expanded 72-hole reverse circulation drilling
      campaign to identify additional proven and probable gold reserves at the El
      Chanate Project. The 72 holes totaled approximately 8,300 meters, and were
      positioned to fill in gaps in the ore body and test the outer limits of the
      currently known ore zones. The Company turned the assay data over to Independent
      Mining Consultants, Inc. (“IMC”) of Tucson, AZ to update the Company’s ore
      reserve and its mine plan. On August 30, 2007, IMC delivered to the Company’s an
      updated resource block model and an updated mine plan and mine production
      schedule (the “2007 Report”).





According
      to the 2007 Report, the Company’s proven and probable reserve tonnage has
      increased by approximately 97 percent from 19.9 million to 39.5 million metric
      tonnes with a gold grade of 0.66 grams per tonne (43.5 million US short tons
      at
      0.019 ounces per ton). The open pit stripping ratio is 0.6:1 (0.6 tonnes of
      waste to one tonne of ore). The updated pit design for the revised plan in
      the
      2007 Report is based on a plant recovery of gold that varies by rock types,
      but
      is expected to average 66.8%. A gold price of US$550 (three year average as
      of
      July 31, 2007 as determined by IMC) per ounce was used to re-estimate the
      reserves compared with a gold price of $450 per ounce used in the previous
      estimate. The Company is in the process of determining the impact this increase
      in proven and probable reserve tonnage will have on reclamation and remediation
      costs.





On
      September 10, 2007, Roger A. Newell resigned as Vice President of Development.
      He will continue to serve as a member of the Company’s Board of
      Directors.





On
      September 14, 2007, the Company entered into a Second Amended Engagement
      Agreement (the “Agreement”) with Christopher Chipman, the Company’s Chief
      Financial Officer, effective May 1, 2007. The Agreement supersedes and replaces
      Mr. Chipman’s prior agreement that expired on August 31, 2007. Pursuant to the
      Agreement, Mr. Chipman is engaged as the Company’s Chief Financial Officer and
      devotes approximately 85% of his time to its business. He receives a monthly
      fee
      of $14,583. The Agreement expires on August 31, 2009 and automatically renews
      for successive one-year periods, unless either party gives at least 30 days
      prior notice to the other party of its intent not to renew. Mr. Chipman can
      terminate the Agreement on 60 days prior notice. The Company can terminate
      the
      Agreement without cause on 30 days prior notice and for cause (as defined in
      the
      Agreement). The Agreement also terminates upon Mr. Chipman’s disability (as
      defined in the Agreement) or death. In the event that the Company terminates
      the
      Agreement without cause, Mr. Chipman will be entitled to a cash termination
      payment equal to his Annual Fee in effect upon the date of termination, payable
      in equal monthly installments beginning in the month following his termination.
      In the event the Agreement is terminated by Mr. Chipman at his election or
      due
      to his death or disability, Mr. Chipman will be entitled to the fees otherwise
      due and payable to him through the last day of the month in which such
      termination occurs. In conjunction with the Agreement, the Company entered
      into
      a change of control agreement similar to the agreements entered into with the
      Company’s other executive officers.




F-32





Subsequent
      to the fiscal year ended July 31, 2007, we issued an aggregate of 3,570,500
      shares of stock upon the exercising of common stock purchase warrants for
      approximate gross proceeds of $1,106,000.





Subsequent
      to July 31, 2007, during August and September 2007, the Company produced
      approximately 6,850 ounces of gold and 5,222 ounces of silver. Of this
      production, the Company sold 6,384 ounces of gold for proceeds amounting to
      approximately $4,380,000.





F-33